Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...

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Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $340,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. Use Table 12-12.

	Earnings before Depreciation
Year 1	$	121,000
Year 2		140,000
Year 3		100,000
Year 4		60,000
Year 5		55,000
Year 6		32,000

The firm is in a 25 percent tax bracket and has a 12 percent cost of capital.

A.) calculate the net present value

business finance

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Answer 1

Answer #1

Time line		0	1	2	3	4	5	6



Cost of new machine		-340000

=Initial Investment outlay		-340000

5 years MACR rate			20.00%	32.00%	19.20%	11.52%	11.52%	5.76%

Profits			121000	140000	100000	60000	55000	32000


-Depreciation	=Cost of machine*MACR%		-68000	-108800	-65280	-39168	-39168	-19584

=Pretax cash flows			53000	31200	34720	20832	15832	12416
-taxes	=(Pretax cash flows)*(1-tax)		39750	23400	26040	15624	11874	9312
+Depreciation			68000	108800	65280	39168	39168	19584
=after tax operating cash flow			107750	132200	91320	54792	51042	28896




+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								0

Total Cash flow for the period		-340000	107750	132200	91320	54792	51042	28896
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928	1.5735194	1.7623417	1.9738227
Discounted CF=	Cashflow/discount factor	-340000	96205.357	105389.031	64999.772	34821.307	28962.602	14639.613
NPV=	Sum of discounted CF=	5017.680985

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Answer 2

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