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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 $500,000. 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 $ 150,000
Year 2 200,000
Year 3 110,000
Year 4 92,000
Year 5 82,000
Year 6 45,000


The firm is in a 20 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.)

Net present value= ___?___

Solutions

Expert Solution

Time line 0 1 2 3 4 5 6
Cost of new machine -500000
=Initial Investment outlay -500000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Profits 150000 200000 110000 92000 82000 45000
-Depreciation =Cost of machine*MACR% -100000 -160000 -96000 -57600 -57600 -28800
=Pretax cash flows 50000 40000 14000 34400 24400 16200
-taxes =(Pretax cash flows)*(1-tax) 40000 32000 11200 27520 19520 12960
+Depreciation 100000 160000 96000 57600 57600 28800
=after tax operating cash flow 140000 192000 107200 85120 77120 41760
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -500000 140000 192000 107200 85120 77120 41760
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 -500000 125000 153061.22 76302.843 54095.299 43759.959 21156.916
NPV= Sum of discounted CF= -26623.76

jeff jeffy answered 1 year ago
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