Question

Crane Lumber, Inc., is considering purchasing a new wood saw
that costs $45,000. 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 $1,400 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 10.30
percent.

What is the project's NPV? **(Do not round intermediate
calculations. Round final answer to the nearest whole dollar, e.g.
5,275.)**

NPV ?

Answer #1

Annual depreciation = 45,000 / 5 = 9,000

Operating cash flow from year 1 to year 5 = (revenue - costs - cash expenses - depreciation)(1 - tax) + depreciation

Operating cash flow from year 1 to year 5 = (100,000 - 60,000 - 10,000 - 9,000)(1 - 0.34) + 9,000

Operating cash flow from year 1 to year 5 = 22,860

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

Year 5 non-operating cash flow = 1,400 - 0.34(1,400 - 0)

Year 5 non-operating cash flow = 1,400 - 476

Year 5 non-operating cash flow = $924

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

NPV = -45,000 + 22,860 / (1 + 0.103)^{1} + 22,860 / (1 +
0.103)^{2} + 22,860 / (1 + 0.103)^{3} + 22,860 / (1
+ 0.103)^{4} + 22,860 / (1 + 0.103)^{5} + 924 / (1 + 0.103)^{5}

**NPV = $41,563**

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