Question

# Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs \$61,793.00. The lathe...

Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs \$61,793.00. The lathe will generate revenues of \$99,910.00 per year for five years. The cost of materials and labor needed to generate these revenues will total \$48,957.00 per year, and other cash expenses will be \$10,944.00 per year. The machine is expected to sell for \$8,130.00 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Steamboat Springs' marginal tax rate is 37.00 percent, and its cost of capital is 12.00 percent. What is the project cash flow for the last year of the project? (HINT: Add project cash flow plus the terminal value).

The Project cash flow for the last year of the project

Annual Operating Cash Flow (OCF) for the Project

Operating Cash Flow (OCF) = [(Annual revenue - cost of materials and labor – Cash expenses) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [{\$99,910 - \$48,957 - \$10,944} x (1 – 0.37)] x [(\$61,793 / 5 Years) x 0.37]

= [\$40,009 x 0.63] + [\$12,358.60 x 0.37]

= \$25,205.67 + \$4,572.68

= \$29,778.35

Therefore, the Project cash flow for the last year of the project = Annual Operating Cash Flow (OCF) for the Project + After-tax salvage value

= Annual Operating Cash Flow + [Salvage value x (1 – tax rate)

= \$29,778.35 + [\$8,130 x (1 – 0.37)]

= \$29,778.35 + [\$8,130 x 0.63]

= \$29,778.35 + \$5,121.90

= \$34,900.25

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