Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $300,000. 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 for an approximate answer but calculate your final answer using the formula and financial calculator methods. Earnings before Depreciation Year 1 $ 82.000 Year 2 110,000 Year 3 80,000 Year 4 51,000 Year 5 45,000 Year 6 28,000 The firm is in a 35 percent tax bracket and has a 11 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.) Net present value b. Under the net present value method, should Oregon Forest Products purchase the equipment asset? O Yes NO

Answer 1

rate positively ... let me know if you need any clarification..

	Computation of depreciation
		i	ii=i*300000
	Year	Rate	Depreciation
	1	20.00%	60,000
	2	32.00%	96,000
	3	19.20%	57,600
	4	11.50%	34,500
	5	11.50%	34,500
	6	5.80%	17,400
		100.00%	300,000
ans a)
	Computation of NPV
	i	ii	iii	iv	v=iii-iv	vi=v*35%	vii=v-vi	viii=vii+iv	ix=viii+i	x	xi=ix*x
	Year	Initial investment	Earning before dep and tax	Depreciation	Earning before tax	Tax @ 35%	Profit after tax	Cash flow	Net cash flow	Tax @ 11%	Profit after tax
	0	-300000							-300000	1.00000	(300,000.00)
	1		82,000	60,000	22,000	7,700	14,300	74,300	74300	0.90090	66,936.94
	2		110,000	96,000	14,000	4,900	9,100	105,100	105100	0.81162	85,301.52
	3		80,000	57,600	22,400	7,840	14,560	72,160	72160	0.73119	52,762.77
	4		51,000	34,500	16,500	5,775	10,725	45,225	45225	0.65873	29,791.11
	5		45,000	34,500	10,500	3,675	6,825	41,325	41325	0.59345	24,524.38
	6		298,000	17,400	280,600	98,210	182,390	199,790	199790	0.53464	106,815.89
											66,132.60
	Therefore NPV =		66,132.60
ans b)	Yes firm should accept the project as NPV is positive.