Question
In: Finance
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 $220,000. 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 | $ | 76,000 | |||
| Year 2 | 73,000 | ||||
| Year 3 | 56,000 | ||||
| Year 4 | 38,000 | ||||
| Year 5 | 27,000 | ||||
| Year 6 | 22,000 | ||||
The firm is in a 35 percent tax bracket and has a 12 percent cost
of capital.
Solutions
Expert Solution
| The net present value is equal to present value of cash inflow less present value of cash outflow | ||||||||
| Calculation of depreciation using 5-year MACRS rate | ||||||||
| Year | MACRS Rate | Depreciable amount | Depreciation | |||||
| 1 | 20% | 220000 | 44000 | |||||
| 2 | 32% | 220000 | 70400 | |||||
| 3 | 19.20% | 220000 | 42240 | |||||
| 4 | 11.50% | 220000 | 25300 | |||||
| 5 | 11.50% | 220000 | 25300 | |||||
| 6 | 5.80% | 220000 | 12760 | |||||
| Calculation of NPV | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Earnings before depreciation | 76000 | 73000 | 56000 | 38000 | 27000 | 22000 | ||
| Less: Depreciation | 44000 | 70400 | 42240 | 25300 | 25300 | 12760 | ||
| Income before tax | 32000 | 2600 | 13760 | 12700 | 1700 | 9240 | ||
| Tax @ 35% | 11200 | 910 | 4816 | 4445 | 595 | 3234 | ||
| Income after tax | 20800 | 1690 | 8944 | 8255 | 1105 | 6006 | ||
| Add: Depreciation | 44000 | 70400 | 42240 | 25300 | 25300 | 12760 | ||
| Free cash flow | -220000 | 64800 | 72090 | 51184 | 33555 | 26405 | 18766 | |
| Discount factor @ 12% | 1 | 0.89286 | 0.79719 | 0.71178 | 0.63552 | 0.56743 | 0.50663 | |
| Present value | -$220,000.00 | $57,857.14 | $57,469.71 | $36,431.76 | $21,324.81 | $14,982.91 | $9,507.44 | |
| Net present value | -$22,426.24 | |||||||
| Since the net present value is negative, the equipment should not be purchased. | ||||||||
jeff jeffy answered 1 year agoRelated Solutions
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
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12-12. Use Appendix B for an approximate answer but calculate your
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Year 2
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Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...
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12-12. Use Appendix B for an approximate answer but calculate your
final answer using the formula and financial calculator
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12-12. Use Appendix B for an approximate answer but calculate your
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Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...
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68,000
Year 5
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final answer using the formula and financial calculator methods.
Earnings before Depreciation Year 1 $ 115,000 Year 2 162,000 Year 3
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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
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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
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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.
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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.
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1. Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The...
1. 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
$
82,000
Year 2
110,000
Year 3
80,000
Year 4
51,000
Year 5
45,000...
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net working capital by 200,000. The equipment
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for 3 years. The company's tax rate is 25 percent
and its cost of capital is 12%. Please show formulas in
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