Question

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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 $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 B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Earnings before Depreciation
Year 1 $ 110,000
Year 2 120,000
Year 3 75,000
Year 4 50,000
Year 5 56,000
Year 6 33,000


The firm is in a 25 percent tax bracket and has a 13 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 the nearest whole dollar amount.)



b. Under the net present value method, should Oregon Forest Products purchase the equipment asset?

  • Yes

  • No

Solutions

Expert Solution

a]

Operating cash flow (OCF) each year = income after tax + depreciation

income after tax = earnings after depreciation - tax

NPV is -$5,727

b]

No

It should not purchase the equipment as the NPV is negative


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