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

Oregon Forest Products will acquire new equipment that falls
under the five-year MACRS category. The cost is $440,000. 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 $ 120,000 Year 2 190,000 Year 3
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12-12. Use Appendix B for an approximate answer but calculate your
final answer using the formula and financial calculator
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Year 1
$
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Year 2
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Year 3
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Year 4
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final answer using the formula and financial calculator
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Oregon Forest Products will acquire new equipment that falls
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equipment is purchased, the following earnings before depreciation
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12-12.
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Year 1
$
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Year 2
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Year 3
120,000
Year 4
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Year 5
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Problem 12-28 MACRS depreciation and net present value [LO12-4]
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12-12. Use Appendix B for an approximate answer but calculate your
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