The Regal Oil Company will purchase as asset that qualifies for three$-$year MACRS depreciation. The initial investment cost is $$167,000$ and the asset will provide the following stream of earnings before depreciation and taxes for the next four years:

Year $1$: $$95,000$

Year $2$: $$80,000$

Year $3$: $$63,500$

Year $4$ $$49,800$

The MACRS Depreciation rates are:

MACRS Depreciation rates for three years MACRS:

Year $1$: $0\mathrm{.}333$

Year $2$: $0\mathrm{.}445$

Year $3$: $0\mathrm{.}148$

Year $4$: $0\mathrm{.}074$

Please prepare your answer in Excel

$1.$ The firm is in a $30$ percent tax bracket and has a $12$ percent cost of capital. Should it purchase

the asset? Use the Net present value and IRR methods to reach inform your decision.

$2.$ What if the state of the economy indicates a $50$ percent chance of an increase in the cost of capital to $16$ percent? Should we consider the project?

HINT to set Operating cash flows:

EBDT

$$ Depreciation

EBT

Taxes $(35\%)$

Earnings After Taxes

$+$ Depreciation

Operating Cash Flows