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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:

 
YearProject AProject 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 Byear(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: