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Chapter 12: The Capital Budgeting Decision
12-25. Solution:
Telstar Communications Corporation
First, determine annual depreciation.
Percentage
Depreciation Depreciation Annual
Year Base (Table 12-9) Depreciation
Then, determine the annual cash flow. Earnings before depreciation and taxes (EBDT) will
be the same for each year, but depreciation and cash flow will differ.
1 2 3 4
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Chapter 12: The Capital Budgeting Decision
26. MACRS depreciation categories (LO12-4) Assume $65,000 is going to be invested in each of the following assets. Using
Tables 12-11 and 12-12, indicate the dollar amount of the first year’s depreciation.
a. Office furniture.
b. Automobile.
c. Electric and gas utility property.
d. Sewage treatment plant.
12-26. Solution:
a. Office furniture – Based on Table 12-8, this falls under
7-year MACRS depreciation. Then, examining Table 12-9, the first year depreciation rate
is .143. Thus:
$65,000 .143 $9, 295´ =
b. Automobile – This falls under 5-year MACRS depreciation. This first year depreciation
rate is .200.
$65,000 .200 $13,000´ =
c. Electric and gas utility property – This falls under 20-year MACRS depreciation. The
first year depreciation rate is .038.
$65,000 .038 $2,470´ =
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
d. Sewage treatment plant – This falls under 15-year MACRS depreciation. This first year
depreciation rate is .050.
$65,000 .050 $3, 250´ =
27. MACRS depreciation and net present value (LO12-4) The Summit Petroleum Corporation will purchase an asset that
qualifies for three-year MACRS depreciation. The cost is $160,000 and the asset will provide the following stream of earnings
before depreciation and taxes for the next four years:
Year 1................... $70,000
Year 2................... 85,000
Year 3................... 42,000
Year 4................... 40,000
The firm is in a 35 percent tax bracket and has an 8 percent cost of capital. Should it purchase the asset? Use the net present
value method.
12-27. Solution:
Summit Petroleum Corporation
First, determine annual depreciation.
Percentage
Depreciation Depreciation Annual
Year Base (Table 12-9) Depreciation
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
Then, determine the annual cash flow.
1 2 3 4
12-27. (Continued)
Then, determine the net present value.
Cash Flow Present
Year (inflows) PVIF at 8% Value
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
The asset should be purchased based on the net present value.
Calculator Solution:
(a)
Using a financial calculator,
Press the following keys: 2nd, CF, 2nd, Clear.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
Press down arrow, enter 35,588, and press Enter.
Press down arrow, enter 1, and press Enter.
28. MACRS depreciation and net present value (LO12-4) 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.
Year 1...................... $112,000
Year 2...................... 105,000
Year 3...................... 82,000
Year 4...................... 53,000
Year 5...................... 37,000
Year 6...................... 32,000
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
The firm is in a 30 percent tax bracket and has a 14 percent cost of capital. Should Oregon Forest Products purchase the
equipment? Use the net present value method.
12-28. Solution:
Oregon Forest Products
First, determine annual depreciation.
Percentage
Depreciation Depreciation Annual
Year Base (Table 12-9) Depreciation
12-28. (Continued)
Then, determine the annual cash flow.
Annual Cash Flow
1 2 3 4 5 6
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Chapter 12: The Capital Budgeting Decision
Then, determine the net present value.
Cash Flow Present
Year (Inflows) PVIF @ 14% Value
The equipment should not be purchased.
Calculator Solution:
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
Press the following keys: 2nd, CF, 2nd, CLR WORK.
Calculator displays CFo, press 300,000 +|–, press the Enter key.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
Press down arrow, enter 36,250, and press Enter.
The equipment should not be purchased because NPV is negative.
29. MACRS depreciation and net present value (LO12-4) 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 $120,000, and it will produce earnings before
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12: The Capital Budgeting Decision
depreciation and taxes of $37,000 per year for three years, and then $19,000 a year for seven more years. The firm has a tax rate of 40
percent. With a cost of capital of 12 percent, should it purchase the asset? Use the net present value method. In doing your analysis, if
you have years in which there is no depreciation, merely enter a zero for depreciation.
12-29. Solution:
Universal Electronics
Because the manufacturing equipment has a 10-year midpoint of its asset depreciation
With seven-year MACRS depreciation, the asset will be depreciated over eight years
We first determine the annual depreciation.
Percentage
Depreciation Depreciation Annual
Year Base (Table 12-9) Depreciation
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Chapter 12: The Capital Budgeting Decision
12-29. (Continued)
Annual Cash Flow
1 2 3 4 5 6 7 8 9 10
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Chapter 12: The Capital Budgeting Decision
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
