Question

Propulsion Labs will acquire new equipment that falls under the five-year MACR category. The cost is $200 000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years:The firm is in a 30 percent tax bracket and has a 14 percent cost of capital. Should Propulsion purchase the equipment? Use NPV method. What is the lowest return interest of this investment?

Year	Cash flow
1	$5 000
2	70 000
3	55 000
4	35 000
5	25 000
6	21 000

Answer 1

Year	MACRS%	EBDT	Depreciation	EBT	Tax (30%)	Profits	Cash Flows
0							-200000
1	20%	5000	-40000	-35000	10500	-24500	15500
2	32%	70000	-64000	6000	-1800	4200	68200
3	19.20%	55000	-38400	16600	-4980	11620	50020
4	11.52%	35000	-23040	11960	-3588	8372	31412
5	11.52%	25000	-23040	1960	-588	1372	24412
6	5.76%	21000	-11520	9480	-2844	6636	18156
						NPV	-$60,614.87

Depreciation = MACRS % x 200,000

Cash Flow = Profits + Depreciation

NPV can be calculated using NPV function in excel or calculator with 14% rate.

As NPV < 0, Propulsion should not purchase the equipment.