The Summitt Petroleum Corporation will purchase an asset that qualifies for threeyear 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 1212.

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:
a.
First, determine annual depreciation. 
Year  Depreciation Base  Percentage Depreciation (Table 1212)  Annual Depreciation  
1  $  180,000  .333  $  59,940  
2  180,000  .445  80,100  
3  180,000  .148  26,640  
4  180,000  .074  13,320  
$  180,000  
Then, determine the annual cash flow. 
Year 1  Year 2  Year 3  Year 4  
EBDT  $  96,000  $  110,000  $  48,000  $  46,000  
Depreciation  59,940  80,100  26,640  13,320  
EBT  $  36,060  $  29,900  $  21,360  $  32,680  
Taxes  12,621  10,465  7,476  11,438  
EAT  $  23,439  $  19,435  $  13,884  $  21,242  
Depreciation  59,940  80,100  26,640  13,320  
Cash flow  $  83,379  $  99,535  $  40,524  $  34,562  
Then, determine the net present value. 
NPV  =  −$180,000 + ($83,379 / 1.12) + ($99,535 / 1.12^{2}) + ($40,524 / 1.12^{3}) + ($34,562 / 1.12^{4}) 
=  $24,603.19 
b.
The asset should be purchased as the NPV is positive at the 12 percent cost of capital. 
Calculator Solution: 
Press the following keys: CF, 2^{nd}, CLR WORK. 
Calculator displays CF_{0}, enter 180,000 +−, press the Enter key. 
Press down arrow, enter 83,379, and press Enter. 
Press down arrow, enter 1, and press Enter. 
Press down arrow, enter 99,535, and press Enter. 
Press down arrow, enter 1, and press Enter. 
Press down arrow, enter 40,524, and press Enter.

Press down arrow, enter 1, and press Enter. 
Press down arrow, enter 34,562, and press Enter. 
Press down arrow, enter 1, and press Enter. 
Press NPV; calculator shows I = 0; enter 12 and press Enter. 
Press down arrow; calculator shows NPV = 0.00. 
Press CPT; calculator shows NPV = 24,603.19 
Appendix Solution: 
Year  Cash Flow (Inflows)  PV_{IF} at 12%  Present Value  
1  $ 83,379  .893  $  74,457.45  
2  99,535  .797  79,329.40  
3  40,524  .712  28,853.09  
4  34,562  .636  21,981.43  
Present value of inflows  $  204,621.36  
Present value of outflows  180,000.00  
Net present value  $  24,621.36  