Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $360,000. 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 $ 115,000 Year 2 162,000 Year 3 110,000 Year 4 59,000 Year 5 59,000 Year 6 36,000 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?

Answer 1

Answer:
a	i	ii	iii=i-ii	iv=iii*35%	v=iii-iv	vi=v+ii
Year	Earning before Depreciation	Depreciation	Earning after Depreciation	Tax @ 35%	Earning after tax	Cashflow from operation	Discount @12%
0						$      (360,000.00)	1	$      (360,000.00)
1	$                                             115,000.00	$           72,000.00	$                                    43,000.00	$           15,050.00	$           27,950.00	$           99,950.00	0.892857	$           89,241.07
2	$                                             162,000.00	$        115,200.00	$                                    46,800.00	$           16,380.00	$           30,420.00	$        145,620.00	0.79719	$        116,087.37
3	$                                             110,000.00	$           69,120.00	$                                    40,880.00	$           14,308.00	$           26,572.00	$           95,692.00	0.71178	$           68,111.68
4	$                                               59,000.00	$           41,472.00	$                                    17,528.00	$             6,134.80	$           11,393.20	$           52,865.20	0.63552	$           33,596.79
5	$                                               59,000.00	$           41,472.00	$                                    17,528.00	$             6,134.80	$           11,393.20	$           52,865.20	0.56743	$           29,997.13
6	$                                               36,000.00	$           20,736.00	$                                    15,264.00	$             5,342.40	$             9,921.60	$           30,657.60	0.50663	$           15,532.09
								$           (7,433.86)
b	Under net present value method Oregon Forest Products should not purchase the asset as its Net present value is negative i.e. -$7,433.86
	Work Note:
Year	Depreciation
1	$                                               72,000.00	=360000*20%
2	$                                             115,200.00	=360000*32%
3	$                                               69,120.00	=360000*19.2%
4	$                                               41,472.00	=360000*11.52%
5	$                                               41,472.00	=360000*11.52%
6	$                                               20,736.00	=360000*5.76%