Question

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:

Answer 1

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