Question

Crane Lumber, Inc., is considering purchasing a new wood saw that costs $65,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $3,000 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane's tax rate is 34 percent, and its opportunity cost of capital is 10.40 percent. What is the project's NPV? (Do not round intermediate calculations. Round final answer to the nearest whole dollar, e.g. 5,275.)

Answer 1

Annual depreciation = 65,000 / 5 = 13,000

OCF from year 1 to year 5 = (Sales - material expenses - cash expenses - depreciation)(1 - tax) + depreciation

OCF from year 1 to year 5 = (100,000- 60,000 - 10,000 - 13,000)(1 - 0.34) + 13,000

OCF from year 1 to year 5 = 11,220 + 13,000

OCF from year 1 to year 5 = $24,220

Year 5 non operating cash flow = Market value - tax(market value - book value)

Year 5 non operating cash flow = 3,000 - 0.34(3,000 - 0)

Year 5 non operating cash flow = 3,000 - 1,020

Year 5 non operating cash flow = 1,980

NPV = Present value of cash inflows - present value of cash outflows

NPV = -65,000 + 24,220 /(1 + 0.104)¹ + 24,220 /(1 + 0.104)² + 24,220 /(1 + 0.104)³ + 24,220 /(1 + 0.104)⁴ + 24,220 /(1 + 0.104)⁵ + 1,980 /(1 + 0.104)⁵

NPV = $27,090