Problem 12-28 MACRS depreciation and net present value [LO4] Propulsion Labs wil
ID: 2792098 • Letter: P
Question
Problem 12-28 MACRS depreciation and net present value [LO4]
Propulsion Labs will acquire new equipment that falls under the five-year MACRS category. The cost is $260,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years: Use Table 12-9 and Appendix B.
The firm is in a 40 percent tax bracket and has a 8 percent cost of capital.
(A) Calculate the net present value. (Negative amounts should be indicated by a minus sign. Round "PV Factor", "Percentage depreciation" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Net Present Value: ___?___
Year 1 $ 78,000 Year 2 86,000 Year 3 60,000 Year 4 40,000 Year 5 33,000 Year 6 24,000The firm is in a 40 percent tax bracket and has a 8 percent cost of capital.
(A) Calculate the net present value. (Negative amounts should be indicated by a minus sign. Round "PV Factor", "Percentage depreciation" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Net Present Value: ___?___
Explanation / Answer
We first need to determine the value of depreiation as per MACRS in each of the 6 years.
The Equipment is classified under 5 Year category. Accordingly, MACRS Rates Applicable and corresponding depreciation amount each year is as under :
Total Net Present Value = 29,775.124
Year Original cost of Equipment Depreciation Rate Amount of Depreciation Year 1 260,000 20.00% 52,000 Year 2 260,000 32.00% 83,200 Year 3 260,000 19.20% 49,920 Year 4 260,000 11.52% 29,952 Year 5 260,000 11.52% 29,952 Year 6 260,000 5.76% 14,976