Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $330,000. 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 $ 111,000 Year 2 130,000 Year 3 95,000 Year 4 57,000 Year 5 48,000 Year 6 31,000 The firm is in a 30 percent tax bracket and has a 12 percent cost of capital. a. Calculate the net present value. b. Under the net present value method, should Oregon Forest Products purchase the equipment asset? Yes No

Answer 1

		Oregon Forest Products
	Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Investment	$     (330,000.00)
	Earnings		$            111,000.00	$                  130,000.00	$      95,000.00	$    57,000.00	$ 48,000.00	$ 31,000.00
	Less: Depreciation		$              66,000.00	$                  105,600.00	$      63,360.00	$    38,016.00	$ 38,016.00	$ 19,008.00
	Net Income before tax		$              45,000.00	$                    24,400.00	$      31,640.00	$    18,984.00	$    9,984.00	$ 11,992.00
	Income Tax @30%		$              13,500.00	$                       7,320.00	$        9,492.00	$      5,695.20	$    2,995.20	$    3,597.60
	Profit after Tax		$              31,500.00	$                    17,080.00	$      22,148.00	$    13,288.80	$    6,988.80	$    8,394.40
	Operating cash flow=(A)	$     (330,000.00)	$              97,500.00	$                  122,680.00	$      85,508.00	$    51,304.80	$ 45,004.80	$ 27,402.40
	P.V Factor 12% for 6 years=(B)	1	0.893	0.797	0.712	0.636	0.567	0.507
	P.V=(A)*(B)	$     (330,000.00)	$              87,067.50	$                    97,775.96	$      60,881.70	$    32,629.85	$ 25,517.72	$ 13,893.02
	NPV=(Total of P.V of all the Six years)	$        (12,234.25)
	NPV is Negative so company should not buy new Equipment
	Working:
	Operating Cash Flow=Profit after tax+Depreciation
	Depreciation
	Year	Equipment Cost	Depreciation Rate	Depreciation Expense
	1	$330,000	20%	$66,000
	2	$330,000	32%	$105,600
	3	$330,000	19.20%	$63,360
	4	$330,000	11.52%	$38,016
	5	$330,000	11.52%	$38,016
	6	$330,000	5.76%	$19,008