Question

The summit petroleum Corporation will purchase an asset that qualifies for three year MACRS depreciation. The...

The summit petroleum Corporation will purchase an asset that qualifies for three year MACRS depreciation. The cost is $430,000 in the ass that will provide the following stream of earnings before depreciation and taxes for the next four years:

Year 1: $200,000
Year 2: 245000
Year 3: 84,000
Year 4: 76,000

The firm is in a 40% tax bracket and has a cost of capital of 12%.

A. Calculate the net present value. Use the formula and financial calculator methods.

B. Under the net present value method, should summit petroleum Corporation purchase the asset?




Table 12-12 Depreciation percentages (expressed in decimals) Depreciation 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year MACRS MACRS MACRS MACRS MACR MACRS 5 Year 0.200 0.143 0.100 0.050 0.038 0.072 0.067 0.062 0.1150.089 0.092 0.069 0.057 0.053 0.045 2 3 0.445 0.320 0.245 0.180 0.095 0.148 0.192 0.1750.144 0.086 0.077 0.074 0.115 0.125 0.115 0.089 0.089 0.058 0.074 0.066 0.062 0.059 0.0450.0660.0590.045 0.0590.045 0.045 0.0590.045 0.045 0.0590.045 0.045 0.0590.045 0.045 0.045 0.045 0.045 0.065 0.065 0.033 0.059 12 13 14.. 0.059 0.059 0.030 16.. 19 20 0.045
Table 12-12 Depreciation percentages (expressed in decimals) Depreciation 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year MACRS MACRS MACRS MACRS MACR MACRS 5 Year 0.200 0.143 0.100 0.050 0.038 0.072 0.067 0.062 0.1150.089 0.092 0.069 0.057 0.053 0.045 2 3 0.445 0.320 0.245 0.180 0.095 0.148 0.192 0.1750.144 0.086 0.077 0.074 0.115 0.125 0.115 0.089 0.089 0.058 0.074 0.066 0.062 0.059 0.0450.0660.0590.045 0.0590.045 0.045 0.0590.045 0.045 0.0590.045 0.045 0.0590.045 0.045 0.045 0.045 0.045 0.065 0.065 0.033 0.059 12 13 14.. 0.059 0.059 0.030 16.. 19 20 0.045
0 0
Add a comment Improve this question
Answer #1

Statement showing depreciation

Year Opening balance Depreciation rates Depreciation Closing balance
1 430000 33.30% 143190 286810
2 286810 44.50% 191350 95460
3 95460 14.80% 63640 31820
4 31820 7.40% 31820 0

Statement showing NPV

Particulars 0 1 2 3 4 NPV
Cost of Machine -430000
Earning before depreciation and tax 200000 245000 84000 76000
Depreciation -143190 -191350 -63640 -31820
PBT 56810 53650 20360 44180
Tax @40% 22724 21460 8144 17672
PAT 34086 32190 12216 26508
Add: depreciation 143190 191350 63640 31820
Cash flow -430000 177276 223540 75856 58328
PVIF @ 12% 1.0000 0.8929 0.7972 0.7118 0.6355
PV -430000 158282 178205 53993 37068 -2452

A) NPV = -2452$

B) No, the firm should not purchase the asset since NPV is negative

Add a comment
Know the answer?
Add Answer to:
The summit petroleum Corporation will purchase an asset that qualifies for three year MACRS depreciation. The...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Telstar Communications is going to purchase an asset for $760,000 that will produce $370,000 per year...

    Telstar Communications is going to purchase an asset for $760,000 that will produce $370,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 12-12. (This represents four years of depreciation based on the half-year convention.) The firm is in a 25 percent tax bracket. Fill in the schedule below for the next four years. Year 1 Year 2 Year 3 Year 4 Earnings...

  • An asset was purchased three years ago for $130,000. It falls into the five-year category for...

    An asset was purchased three years ago for $130,000. It falls into the five-year category for MACRS depreciation. The firm is in a 25 percent tax bracket. Use Table 12-12. a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $16,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.) Tax loss on the sale Tax benefit b. Compute the gain...

  • An asset was purchased three years ago for $100,000. It falls into the five-year category for...

    An asset was purchased three years ago for $100,000. It falls into the five-year category for MACRS depreciation. The firm is in a 25 percent tax bracket. Use Table 12–12. a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $13,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.) b. Compute the gain and related tax on the sale if...

  • An asset was purchased three years ago for $105,000. It falls into the five-year category for...

    An asset was purchased three years ago for $105,000. It falls into the five-year category for MACRS depreciation. The firm is in a 25 percent tax bracket. Use Table 12-12 a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $13,560. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.) Tax loss on the sale Tax benefit b. Compute the gain...

  • Problem 12-26 MACRS depreciation categories (LO12-4) 54 Assume $73,000 is going to be invested in each...

    Problem 12-26 MACRS depreciation categories (LO12-4) 54 Assume $73,000 is going to be invested in each of the following assets. Using Table 12-11 and Table 12-12, indicate the dollar amount of the first year's depreciation. points First Year's Depreciation eBook a. Office furniture b. Automobile c. Electric and gas utility property d. Sewage treatment plant Hint Print References Exam 3 - Chapters 9-13 table_12-11.jpg 561x473 pixels Table 12-11 Categories for depreciation write-off Class 3-year MACRS All property with ADR midpoints...

  • Assume $75,000 is going to be invested in each of the following assets. Using Table 12-11 and Table 12-12. Indica...

    Assume $75,000 is going to be invested in each of the following assets. Using Table 12-11 and Table 12-12. Indicate the dollar amount of the first year's depreciation. First Year's Depreciation a. Office furniture b. Automobile c. Electric and gas utility property d. Sewage treatment plant Table 12-11 Categories for depreciation write-off Class 3-year MACRS 5-year MACRS 7-year MACRS 10-year MACRS 15-year MACRS All property with ADR midpoints of four years or less. Autos and light trucks are excluded from...

  • Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset...

    Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12–11 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $255,000, and it will produce earnings before depreciation and taxes of $85,000 per year for three years, and then $40,000 a year for seven more years. The firm has a tax rate of 25 percent. Assume the...

  • Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset...

    Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12-11 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $235,000, and it will produce earnings before depreciation and taxes of $76,000 per year for three years, and then $37,000 a year for seven more years. The firm has a tax rate of 25 percent. Assume the...

  • The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The...

    The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $370,000. Of this amount, $250,000 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 $120,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate...

  • Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...

    Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $300,000. 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 for an approximate answer but calculate your final answer using the formula and financial calculator methods. Earnings before Depreciation Year 1 $ 82.000 Year 2 110,000 Year 3 80,000 Year 4 51,000 Year 5 45,000 Year 6...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT