Question

Crane Lumber, Inc., is considering purchasing a new wood saw that costs $70,000. 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 $2,100 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 15.40 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

Since we have a straight-line depreciation, the depreciation amount each year will be = 70000/5 = 14000. The first year cash flow will be = (100,000 - 70,000 - 10,000) x (1 - 0.34) = 13200. These will be the cash flows for the years 2, 3 and 4 as well. For the 5th year we will have the cash flow = (100,000 - 70,000 - 10,000 + 2,100) x (1 - 0.34) = 14586.

Hence, the NPV will be = 13200/1.154 + 13200/1.154^2 + 13200/1.154^3 + 13200/1.154^4 + 14586/1.154^5 = 44509.83