Propulsion Labs will acquire new equipment that falls under the five-year MACRS

Question

Propulsion Labs 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:

Calculate the net present value. (Negative amounts should be indicated by a minus sign. Round "PV Factor", "Percentage depreciation" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

   Year 1 $ 110,000 Year 2 120,000 Year 3 75,000 Year 4 50,000 Year 5 56,000 Year 6 33,000 The firm is in a 35 percent tax bracket and has a 13 percent cost of capital.    (a)

Calculate the net present value. (Negative amounts should be indicated by a minus sign. Round "PV Factor", "Percentage depreciation" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

       Net present value $         (b) Under the net present value method, should Propulsion Labs purchase the equipment asset?    Yes No

Explanation / Answer

a)

b)No

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial Cost -300000 110,000 120,000 75,000 50,000 56,000 33,000 EBIDTA Depreciation % 20% 32% 19.20% 11.52% 11.52% 5.76% Depreciation -60000 -96000 -57600 -34560 -34560 -17280 Net incmoe 32500 15600 11310 10036 13936 10218 Cash flow -300000 92500 111600 68910 44596 48496 27498 Net present value ($16,103.29)

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