The Summit Petroleum Corporation will purchase an asset that qualifies for three

Question

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $120,000 and the asset will provide the following stream of eamings before depreciation and taxes for the next four years: Use Table 12-12. Year 1 $52,000 Year 2 60,000 Year 4 27,000 and financial calculator methods. a. 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.) Net present value b. Under the net present value method, should Summit Petroleum Corporation purchase the asset? O Yes O No

Explanation / Answer

a)NPV=$14,630.87

b. Yes, Project should be accepted as NPV is positive.

Year Cost Earnings Depreciation rate% Depreciation (cost * depreciation rate) Profit (earnings-depreciation) Tax @ 30% Profit after tax Cash flow (Profit after tax + depreciation) Discounting factor @ 8% Present value 0 $ (120,000.00)         1.000 $ (120,000.00)       1 $ 52,000.00 $       0.33 $ (39,996.00) $ 12,004.00 $ 3,601.20 $    8,402.80 $               48,398.80         0.926 $      44,813.70       2 $ 60,000.00 $       0.44 $ (53,340.00) $    6,660.00 $ 1,998.00 $    4,662.00 $               58,002.00         0.857 $      49,727.37       3 $ 36,000.00 $       0.15 $ (17,772.00) $ 18,228.00 $ 5,468.40 $ 12,759.60 $               30,531.60         0.794 $      24,236.97       4 $ 27,000.00 $       0.07 $   (8,892.00) $ 18,108.00 $ 5,432.40 $ 12,675.60 $               21,567.60         0.735 $      15,852.83 NPV $      14,630.87

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.