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

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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