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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 $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 2 years ago
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