The Summitt Petroleum Corporation will purchase an asset that qualifies for thre

Question

The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $320,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12 located at http://lectures.mhhe.com/connect/0077861612/ch12/Table_12_12.jpg.

Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $320,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12 located at http://lectures.mhhe.com/connect/0077861612/ch12/Table_12_12.jpg.

Explanation / Answer

PART B: - Yes, Asset should be purchased because of a positive NPV of $25,825.49 (Answer)

PART A: - Calculation of Project Cash Flows and Net Present Value Year 0 1 2 3 4 Earnings before depreciation and taxes $                      -   $   1,50,000.00 $   2,00,000.00 $    68,000.00 $    66,000.00 Less: Depreciation (33.30%; 44.50%; 14.80% and 7.40%) $                      -   $ -1,06,560.00 $ -1,42,400.00 $ -47,360.00 $ -23,680.00 Earnings before taxes $                      -   $       43,440.00 $       57,600.00 $    20,640.00 $    42,320.00 Less: Tax @ 30% $                      -   $     -13,032.00 $     -17,280.00 $     -6,192.00 $ -12,696.00 Net Income $                      -   $       30,408.00 $       40,320.00 $    14,448.00 $    29,624.00 Add: Depreciation $                      -   $   1,06,560.00 $   1,42,400.00 $    47,360.00 $    23,680.00 Anuual Cash Inflow $                      -   $   1,36,968.00 $   1,82,720.00 $    61,808.00 $    53,304.00 Cost of Asset $ -3,20,000.00 $                      -   $                      -   $                   -   $                   -   Project Cash Flows $ -3,20,000.00 $   1,36,968.00 $   1,82,720.00 $    61,808.00 $    53,304.00 P.V. Factor of 12% 1.00000000 0.89285714 0.79719388 0.71178025 0.63551808 P.V. of Cash Flows $ -3,20,000.00 $   1,22,292.86 $   1,45,663.27 $    43,993.71 $    33,875.66 Net Present Value (Total of P.V. of Cash Flows) $                                                                                                                                  25,825.49 (Answer)

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