## Friday, 22 May 2015

### The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is \$180,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years:

 The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is \$180,000 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 \$ 96,000 Year 2 110,000 Year 3 48,000 Year 4 46,000

 The firm is in a 35 percent tax bracket and has a cost of capital of 12 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.)

 Net present value \$

 b. Under the net present value method, should Summitt Petroleum Corporation purchase the asset? Yes

Explanation:

### X-treme Vitamin Company is considering two investments, both of which cost \$11,000. The cash flows are as follows:

 X-treme Vitamin Company is considering two investments, both of which cost \$11,000. The cash flows are as follows:

 Year Project A Project B 1 \$ 15,000 \$ 8,000 2 6,000 5,000 3 5,000 10,000

 Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)

 Payback Period Project A year(s) Project B year(s)

 a-2. Which of the two projects should be chosen based on the payback method? Project A

 b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent.(Do not round intermediate calculations and round your final answers to 2 decimal places.)

 Net Present Value Project A \$ Project B \$

 b-2. Which of the two projects should be chosen based on the net present value method? Project A

 c. Should a firm normally have more confidence in the payback method or the net present value method? Net present value method

Explanation: