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 $380,000. 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.

The firm is in a 30 percent tax bracket and has a 12 percent cost of capital.

a. Calculate the net present value

Earnings before Depreciation Year 1 $ 116,000 Year 2 168,000 Year 3 115,000 Year 4 62,000 Year 5 62,000 Year 6 37,000 Table 12-12 Depreciation percentages (expressed in decimals) Depreciation Year 5-Year 3-Year MACRS MACRS MACRS MACRS MACRS MACRS 7-Year 10-Year 15-Year 20-Year 0.200 0.320 0.192 0.115 0.115 0.058 0.143 0.245 0.175 0.125 0.089 0.089 0.089 0.045 0.100 0.180 0.144 0.115 0.092 0.074 0.066 0.066 0.065 0.065 0.033 0.050 0.095 0.086 0.077 0.069 0.062 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.030 0.038 0.072 0.067 0.062 0.057 0.053 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.017 1.000 0.445 2 3 4 8 9 15.. 16 19 20.. 1.000 1.000 1.000 1.000 1.000

Explanation / Answer

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A B C D E F G Year 0 1 2 3 4 5 6 1 New machine cost savings -380000 2 Earnings before depreciation 116,000 168,000 115,000 62,000 62,000 37,000 3 Depreciation rate as per MACRS 0.2 0.32 0.192 0.115 0.115 0.058 4 Depreciation = Depreciation rate * Machine Cost 76000 121600 72960 43700 43700 22040 5 EBIT=Earnings before depreciation Earnings before Depreciation 40,000 46,400 42,040 18,300 18,300 14,960 6 Tax =EBIT*Tax rate 12000 13920 12612 5490 5490 4488 7 Net Income =EBIT-tax 28000 32480 29428 12810 12810 10472 8 Depreciation 76000 121600 72960 43700 43700 22040 9 Free Cash Flow=net income+depreciation -380000 104000 154080 102388 56510 56510 32512 10 Cost of Capital 12.00% 11 NPV -6983.46 NPV(A10,D9:G9)+A9

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