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 $180,000 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	$	96,000
Year 2		110,000
Year 3		48,000
Year 4		46,000

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.)

What is the net present value?

3 year MACRS 0.333, 0.445, 0.148 and 0.074

Solutions

Expert Solution

NPV= 24603.19

Year	Initial cash flow	OCF
0	-180000
1		$83,379.00
2		$99,535.00
3		$40,524.00
4		$34,562.00
	NPV	$24,603.19

OCF calculated as

OCF
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1	96000	-59940	36060	-12621	23439	83379
2	110000	-80100	29900	-10465	19435	99535
3	48000	-26640	21360	-7476	13884	40524
4	46000	-13320	32680	-11438	21242	34562

jeff jeffy answered 1 year ago

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