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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 $420,000. 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 $ 135,000
Year 2 182,000
Year 3 125,000
Year 4 68,000
Year 5 69,000
Year 6 39,000


The firm is in a 35 percent tax bracket and has a 12 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 2 decimal places.)
  



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

Yes
No

rev:

Solutions

Expert Solution

a

Time line 0 1 2 3 4 5 6
Cost of new machine -420000
=Initial Investment outlay -420000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Profits 135000 182000 125000 68000 69000 39000
-Depreciation =Cost of machine*MACR% -84000 -134400 -80640 -48384 -48384 -24192
=Pretax cash flows 51000 47600 44360 19616 20616 14808
-taxes =(Pretax cash flows)*(1-tax) 33150 30940 28834 12750.4 13400.4 9625.2
+Depreciation 84000 134400 80640 48384 48384 24192
=after tax operating cash flow 117150 165340 109474 61134.4 61784.4 33817.2
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -420000 117150.00 165340.0000 109474.00 61134.4 61784.4 33817.2
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194 1.7623417 1.9738227
Discounted CF= Cashflow/discount factor -420000 104598.2143 131808.0357 77921.43085 38852.016 35058.128 17132.846
NPV= Sum of discounted CF= -14629.33

b

No as NPV is negative

jeff jeffy answered 10 months ago
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