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

Question

The Summitt Petroleum Corporation will purachse an asset that qualifies for three-year MACRS deprciation. The cost is $120,000 and the asset will provide the follwin stream of earnings before deprciation and taxes for the next four years.
Year 1 - $54,000
Year 2 - $66,000
Year 3 - $38,000
Year 4 - $29,000
The firm is in a 35% taxl bracket and has an 12% cost of Capital
a. Calculate the net present value.
b. Under the net present value method, should Summit Petroleum Corporation purache the asset?
Yes or no?

Explanation / Answer

Depreciation Yr 1 = 120,000*(33.33%) = 39,996
Depreciation Yr 2 = 120,000*(44.45%) = 53,340
Depreciation Yr 3 = 120,000*(14.81%) = 17,772
Depreciation Yr 4 = 120,000*(7.41%) = 8,892

ATCF Yr 1 = 54,000 - (54,000-39,996)*(35%) = 49,098.6
ATCF Yr 2 = 66,000 - (66,000-53,340)*(35%) = 61,569.0
ATCF Yr 3 = 38,000 - (38,000-17,772)*(35%) = 30,920.2
ATCF Yr 4 = 29,000 - (29,000-8,892)*(35%) = 21,962.2

(a) NPV = -120,000 + 49,098.6*(P/F,i=12%,N=1) + 61,569.0*(P/F,i=12%,N=2) + 30,920.2*(P/F,i=12%,N=3) + 21,962.2*(P/F,i=12%,N=4)

NPV = -120,000 + 49,098.6*(0.8929) + 61,569.0*(0.7972) + 30,920.2*(0.7118) + 21,962.2*(0.6355)

NPV = 8,888.92

(b) Yes. Because it will represent profits of 8,888.92.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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