Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $500,000. 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			200,000
Year 3			110,000
Year 4			92,000
Year 5			82,000
Year 6			45,000

The firm is in a 20 percent tax bracket and has a 12 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

YEAR 0 1 3 6 $150,000.00 $200,000.00 $110,000.00 $92,000.00 $82,000.00 $45,000.00 Earnings before depreciation $100,000.00 $160,000.00 $96,000.00 $57,600.00 $57,600.00 $28,800.00 less: depreciation $34,400.00 $6,880.00 $50,000.00 $40,000.00 $14,000.00 $24,400.00 $16,200.00 ЕВT $8,000.00 $2,800.00 $4,880.00 $10,000.00 $3,240.00 less: tax @20% $40,000.00 $32,000.00 $11,200.00 $27,520.00 $19,520.00 $12.960.00 EAT $160,000.00 $57,600.00 add: $100,000.00 $96,000.00 $57,600.00 $28,800.00 depreciation $140,000.00 $192,000.00 $107,200.00 $85,120.00 $77,120.00 $41,760.00 OCF initial investment: -$500,000.00 Depreciable asset -$500,000.00 $140,000.00 $192,000.00 $107,200.00 $85,120.00 $77,120.00 $41,760.00 net cash flows 0.79719 0.89286 0.71178 0.56743 pv @ 12% 1 0.63552 0.50663 -$500,000.00 $125,000.00 $153,061.22 $76,302.84 $54,095.30 $43,759.96 $21,156.92 PRESENT VALUE NPV -$26,623.76 No, as having negative NPV