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(Solved) 12-7 Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $260,000.


12-7

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $260,000. 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.

  Earnings before Depreciation Year 1 $78,000  Year 2  86,000  Year 3  60,000  Year 4  40,000  Year 5  33,000  Year 6  24,000   


The firm is in a 40 percent tax bracket and has a 8 percent cost of capital.


a. Calculate the net present value.


Net present value=


12-8

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $280,000. Of this amount, $200,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $80,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.


The contract will require an additional investment of $55,000 in working capital at the beginning of the first year and, of this amount, $35,000 will be returned to the Spartan Technology Company after six years.


The investment will produce $80,000 in income before depreciation and taxes for each of the six years. The corporation is in a 30 percent tax bracket and has a 6 percent cost of capital.


a. Calculate the net present value


Net Present Value=

 


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