Question

Crane Lumber, Inc., is considering purchasing a new wood saw that costs $50,000. 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 $3,100 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 17.50 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

rate positively ..

Computation of NPV
	year	0	1	2	3	4	5
A	Initial investment	-50000
	Operating cash flow
i	sales		100,000	100,000	100,000	100,000	100,000
ii	Cost of material		60,000	60,000	60,000	60,000	60,000
iii	Other cost		10,000	10,000	10,000	10,000	10,000
iv	depreciation		10,000.00	10,000.00	10,000.00	10,000.00	10,000.00
v=i-ii-iii-iv	Profit before tax		20,000.00	20,000.00	20,000.00	20,000.00	20,000.00
vi=v*34%	Tax @ 34%		6,800.00	6,800.00	6,800.00	6,800.00	6,800.00
vii=v-vi	Net income		13,200.00	13,200.00	13,200.00	13,200.00	13,200.00
B=vii+iv	Operating cash flow=		23,200.00	23,200.00	23,200.00	23,200.00	23,200.00
C	Salvage value						2046
	3100*(1-34%)
D=A+B+C	Net cash flow	-$50,000.00	$23,200.00	$23,200.00	$23,200.00	$23,200.00	$25,246.00
E	PVIF @ 17.5%	1	0.85106383	0.724309642	0.616433738	0.524624458	0.4464889
F=D*E	Present value	-$50,000.00	$19,744.68	$16,803.98	$14,301.26	$12,171.29	$11,272.06	$24,293.27
	NPV =	$24,293.27
	ans =	24,293.2735