Oregon Forest Products will acquire new equipment that falls

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

Solution

Best of Luck. God Bless

		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