Question

Oregon Forest Products will acquire new equipment that falls under the five year MACRS category. The cost is $300,000. the equipment is purchased the following samings before depreciation and we will be generated for the next six years. Use Table 12.12. Use Apendix for an approximate answer but calculate your final answer using the formula and financial calculator methods Earrings Depreciation 37.000 32.000 The firm is in a 30 percent tax bracket and has a 14 percent cost of capital a. Calculate the net present Value (A negative amount should be indicated by a minus sig mediate calculations and round your answer to 2 decimal places) Net present values (16,10320) b. Under the res t value method should Oregon Forest Products purchase the equipments

Answer 1

Statement showing depreciation

Year	Opening balance	Depreciation Rates	Depreciation (Purchase price x Depreciation rates)	Closing Balance
1	300000	20%	60000	240000
2	240000	32%	96000	144000
3	144000	19%	57600	86400
4	86400	12%	34560	51840
5	51840	12%	34560	17280
6	17280	6%	17280	0

Statement showing NPV

Particulars	0	1	2	3	4	5	6	NPV = sum of PV
Cost of new equipment	-300000
Earnings before depreciation		112000	105000	82000	53000	37000	32000
Depreciation		-60000	-96000	-57600	-34560	-34560	-17280
PBT		52,000	9,000	24,400	18,440	2,440	14,720
Tax @ 30%		15,600	2,700	7,320	5,532	732	4,416
PAT		36,400	6,300	17,080	12,908	1,708	10,304
Add: Depreciation		60,000	96,000	57,600	34,560	34,560	17,280
Annual cash flow		96,400	1,02,300	74,680	47,468	36,268	27,584
Total cash flow	-300000	96,400	1,02,300	74,680	47,468	36,268	27,584
PVIF @ 14%	1.0000	0.8772	0.7695	0.6750	0.5921	0.5194	0.4556
PV	-300000.00	84561.40	78716.53	50406.87	28104.87	18836.46	12566.90	-26,806.97

Thus NPV = -26806.97$

NO, equipment should not be purchased as NPV is negative