Oregon Forest Products will acquire new equipment that falls under the five-year

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?

Explanation / Answer

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%

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