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 $4,500 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 13.10 percent. What is the project's NPV? (Do not round intermediate calculations. Round final answer to the nearest whole dollar, e.g. 5,275.) Excel Template (Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you've been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.) NPV $

Answer 1

Cost of Asset = $65,000 life of Asset = 5 years It is to be depreciated on a straight line basis over five years to o. So, Annual Depreciation - cost of Asset . uję of Asset $65,000 = $13,000 Now, we will calculate annual operating cash flow for 5 years. . Annual OCF » Prevenue - Cost of Material & Expense – Depreciation ] C1-tax sate) + Depreciation = $100,000 - $60,000 - $10,000 - $13,000] (1-0.34)+ $ 13,000 17,000 (0.66) + $13,000 = STIN 09 .

= $11,220+ $13,000 = $ 24,220 calculate After Tax salvage value Now, we will in sth уоң. Book value Cafter 5th year Depreciation) =0 So, Gain on sale of asset = Salvage Value-Book value. e value 30 = $4,500- $0 - $4,500 After Taey salvage Value - Salvage value -- Tax (Gain) = $4,500-(0.34($4,500)] z $4,500 – $1,530 = $2,970 So, the cash inflows realized in Year 1 to 4 are $ 24,220 and in year 5, cash inflow is $24,220 + $2,970 = $ 27,190

Now, we will calculate present value of Lash infloco PV= C [leegye (148? tipos * 17834 + mooi . Here, lig C2, C3, Cu,lg are cash inflows in year! 2,3,4,5 respectively. to opportunity cost of capital = 13,10% or 0:13) PV = $24,220 ; $ 24,220 $24,280 - $24,220 + $27,190 (1+0.131) (1+0.131)2 + (1+0.131)37 (1+0.13147 (1+0.13735 = $24,220 $ 24,220 1•131 11.1312 $94,220 + $24,820 + $ 27,190 (1.13113' 1114 ' 11.13/15 ' = $ 21,414.6773+ $18,934.2858+ $ 16,741.1899 + $14,802.1131. + $ 14,692.5164 > $86,584.7825 Or $86,584. 78 (approx) NPU= present value of lash inflow - Initial Investment - $86,584.78 - $ 65,000 a $ 21,584,78 02 $ 21,585 (approx) Answer