Question

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
Year 6			28,000

The firm is in a 35 percent tax bracket and has a 11 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.)
  

2.

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $370,000. Of this amount, $250,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $120,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

The contract will require an additional investment of $58,000 in working capital at the beginning of the first year and, of this amount, $38,000 will be returned to the Spartan Technology Company after six years.

The investment will produce $90,000 in income before depreciation and taxes for each of the six years. The corporation is in a 30 percent tax bracket and has a 5 percent cost of capital.

a. Calculate the net present value.(Do not round intermediate calculations and round your answer to 2 decimal places.)
  

3. An asset was purchased three years ago for $200,000. It falls into the five-year category for MACRS depreciation. The firm is in a 40 percent tax bracket. Use Table 12–12.

a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $23,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)
  

b. Compute the gain and related tax on the sale if the asset is sold now for $72,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)
  

4.

DataPoint Engineering is considering the purchase of a new piece of equipment for $340,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $160,000 in nondepreciable working capital. Sixty thousand dollars of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix Bfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Amount
1	$	215,000
2		180,000
3		150,000
4		135,000
5		105,000
6		95,000

The tax rate is 30 percent. The cost of capital must be computed based on the following:

		Cost (aftertax)			Weights
Debt	Kd		11.30	%		25	%
Preferred stock	Kp		12.20			10
Common equity (retained earnings)	Ke		17.00			65

a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your depreciation base and annual depreciation answers to the nearest whole dollar. Round your percentage depreciation answers to 3 decimal places.)
  

b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year 6. (Do not round intermediate calculations and round your answers to 2 decimal places.)
  

c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations. Round your answer to 2 decimal places.)
  

Answer 1

Answer 1: First we will have to calculate the Depreciation amount of the project year on year

Depreciation amount is calculated as machine Cost * rate of depreciation

Year	Rate of depreciation	Depreciation Amount
1	20%	60000
2	32%	96000
3	19.20%	57600
4	11.52%	34560
5	11.52%	34560
6	5.76%	17280

Now we will have to calculate the cash flow from the project  to calculate the NPV

present value Formula = Cash flow /(1+ Discount rate )^(no of years)

Discount rate (Cost of Capital) = 11%

Year	0	1	2	3	4	5	6
Initial Cost	300000
Earning before Depreciation		82000	110000	80000	51000	45000	28000
Depreciation		60000	96000	57600	34560	34560	17280
Taxable Income (Earning - Depreciation)		22000	14000	22400	16440	10440	10720
Tax Amount(35%) (Taxable income *0.35)		7700	4900	7840	5754	3654	3752
PAT (Taxable amount - Tax)		14300	9100	14560	10686	6786	6968
Cash Flow (PAT + Depreciation)	-300000	74300	105100	72160	45246	41346	24248
present Value(Cash Flow/(1+0.11)^(no of years)	-300000	66,937	85,302	52,763	29,805	24,537	12,964
NPV	-27693

NPV of the Project is coming out in negative and is equal to -27693.

It is not viable to opt for this project.

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