Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...

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

Homework Answers

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

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