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. UseTable 12-12. UseAppendix Bfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

Earnings before DepreciationYear 1$78,000Year 286,000Year 360,000Year 440,000Year 533,000Year 624,000

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. UseTable 12-12. UseAppendix Bfor 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=