The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $360,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12.
| Year 1 |
$ |
170,000 |
|
| Year 2 |
|
227,000 |
|
| Year 3 |
|
80,000 |
|
| Year 4 |
|
72,000 |
|
The firm is in a 30 percent tax bracket and has a cost of capital of 9 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
b. Under the net present value method, should Summit Petroleum Corporation purchase the asset?
Yes
No