The Summit Petroleum Corporation will purchase as asset that qualifies for three-year MACRS depreciation. The cost is $80,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years:

Year EBIT MACRS depreciation rate

1 $36,000 .333

2 40,000 .445

3 31,000 .148

4 19,000 .074

Salvage value of the asset will be $10,000 and the firm is on a 34 percent tax bracket and has an 8 percent cost of capital.

1. Provide expected cash flows for the next 4 years.

2. Should it purchase the asset? Answer the question according to the NPV method.

3. What are the IRR, payback period, and profitability index respectively?