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The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost...

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $120,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12. Year 1 $ 54,000 Year 2 66,000 Year 3 38,000 Year 4 29,000 The firm is in a 35 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

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Expert Solution

Time line 0 1 2 3 4
Cost of new machine -120000
=Initial Investment outlay -120000
3 years MACR rate 33.33% 44.45% 14.81% 7.41% 0.00%
Profits 54000 66000 38000 29000
-Depreciation =Cost of machine*MACR% -39996 -53340 -17772 -8892 0 =Salvage Value
=Pretax cash flows 14004 12660 20228 20108
-taxes =(Pretax cash flows)*(1-tax) 9102.6 8229 13148.2 13070.2
+Depreciation 39996 53340 17772 8892
=after tax operating cash flow 49098.6 61569 30920.2 21962.2
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -120000 49098.6 61569 30920.2 21962.2
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194
Discounted CF= Cashflow/discount factor -120000 43838.036 49082.43 22008.388 13957.375
NPV= Sum of discounted CF= 8886.23

jeff jeffy answered 4 months ago
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