Problem 12-27 MACRS depreciation and net present value L012-4] provide the follo
ID: 2566064 • Letter: P
Question
Problem 12-27 MACRS depreciation and net present value L012-4] provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12 Year s 98,000 Year 119,000 The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $200,000 and the asset will 2 Year 50,000 Year 48,000 4 The firm is in a 36 percent tax bracket and has a cost of capital of 7 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value b. Under the net present value method, should Summit Petroleum Corporation purchase the asset? O Yes O NoExplanation / Answer
Answer a Calculation of NAV Year Cash flow Discount Factor @ 7% Present Value 0 -$200,000 1.00000 -$200,000 1 $86,718 0.93458 $81,044 2 $108,164 0.87344 $94,475 3 $42,663 0.81630 $34,826 4 $36,055 0.76290 $27,506 Net Present Value $37,851.33 Answer b As the net present value of cash flows from asset is positive , Summit Petroleum Corporation should purchase the asset. Working Calculation of Operating cash flows from the asset Year 1 2 3 4 Earnings before depreciation and taxes $98,000 $119,000 $50,000 $48,000 Less : Depreciation $66,660 $88,900 $29,620 $14,820 Profit before Tax $31,340 $30,100 $20,380 $33,180 Less : Tax @ 36% $11,282 $10,836 $7,337 $11,945 Profit after Tax $20,058 $19,264 $13,043 $21,235 Add : Depreciation $66,660 $88,900 $29,620 $14,820 Operating Cash flow $86,718 $108,164 $42,663 $36,055 Calculation of depreciation on Asset using 3 Year MACRS depreciation Year Cost of asset Depreciation rate Depreciation 1 $200,000 33.33% $66,660 2 $200,000 44.45% $88,900 3 $200,000 14.81% $29,620 4 $200,000 7.41% $14,820