Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $480,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Earnings before Depreciation Year 1 $ 150,000 Year 2 190,000 Year 3 120,000 Year 4 86,000 Year 5 76,000 Year 6 43,000 The firm is in a 30 percent tax bracket and has a 13 percent cost of capital. a. Calculate the net present value. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) b. Under the net present value method, should Oregon Forest Products purchase the equipment asset? Yes No

Answer 1

NPV = Present value of cash inflows – Present value of cash outflows

Year	1	2	3	4	5	6
Earnings before Depreciation and Taxes	150,000	190,000	120,000	86,000	76,000	43,000
Less: Depreciation using MACRS table	96,000	153,600	92,160	55,296	55,296	27,648
Earnings before tax	54,000	36,400	27,840	30,704	20,704	15,352
Less: Tax 30%	16,200	10,920	8,352	9,211.2	6,211.2	4,605.6
Earnings after tax	37,800	25,480	19,488	21,492.8	14,492.8	10,746.4
Add: Depreciation	96,000	153,600	92,160	55,296	55,296	27,648
Cash Flow	133,800	179,080	111,648	76,788.8	69,788.8	38,394.4

NPV = 133,800/(1.13) + 179,080/(1.13)² + 111,648/(1.13)³ + 76,788.8/(1.13)⁴ + 69,788.8/(1.13)⁵ + 38,394.4/(1.13)⁶ – 480,000

= -$40,553.23

Since NPV is negative, the asset should not be purchased

NO