Question

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 $ 80,000 Year 2 98,000 Year 3 70,000 Year 4 45,000 Year 5 36,000 Year 6 26,000 The firm is in a 30 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

Answer 1

NPV is $ -386182.96

No

(Since NPV is negative, do not purchase the equipment)

Step 1:

OCF Calculation
Year	Depreciation rate	OCF		MACRS 5 year
1	20%	Year	EBD	Depreciation	EBIT	Tax	PAT	OCF
2	32%	1	80000	60000	20000	6000	14000	74000
3	19.20%	2	98000	96000	2000	600	1400	-94600
4	11.52%	3	70000	57600	12400	3720	8680	-48920
5	11.52%	4	45000	34560	10440	3132	7308	-27252
6	5.76%	5	36000	34560	1440	432	1008	-33552
		6	26000	17280	8720	2616	6104	-11176

Step 2:

NPV Calculation
Year	Cash flows
0	-300000
1	74000		NPV	-386182.96
2	-94600
3	-48920
4	-27252
5	-33552
6	-11176

WORKINGS