Question

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= ___?___

Answer 1

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