Question

Rocky Mountain 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 $3,500 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Rocky Mountain’s tax rate is 34 percent, and its opportunity cost of capital is 16.00 percent.

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

Should the company purchase the saw?

Answer #1

A | B | C | D | E | F | ||||||||

Year | 0 | 1 | 2 | 3 | 4 | 5 | |||||||

1 | Initial Cost | 65000 | |||||||||||

2 | Revenues | 100000 | 100000 | 100000 | 100000 | 100000 | |||||||

3 | Cost of Material and labour | 60000 | 60000 | 60000 | 60000 | 60000 | |||||||

4 | Cash Expenses | 10000 | 10000 | 10000 | 10000 | 10000 | |||||||

5 | Depreciation | 13000 | 13000 | 13000 | 13000 | 13000 | Depreciation =( Initial Cost-0)/5 | ||||||

6 | EBT | 17000 | 17000 | 17000 | 17000 | 17000 | EBT = Revenues - Cost of Material and Labour - Cash expenses - Depreciation | ||||||

7 | Tax = EBIT * Tax Rate | 5780 | 5780 | 5780 | 5780 | 5780 | |||||||

8 | EAT = EBIT - Tax | 11220 | 11220 | 11220 | 11220 | 11220 | |||||||

9 | Depreciation | 13000 | 13000 | 13000 | 13000 | 13000 | |||||||

10 | After Tax Salvage Value | 0 | 0 | 0 | 0 | 2310 | Salvage Value*(1-tax rate) | ||||||

11 | Operating Cash Flow | -65000 | 24220 | 24220 | 24220 | 24220 | 26530 | (EAT+Depreciation+After Tax Salvage Value) | |||||

12 | Discount Rate | 16% | |||||||||||

NPV | 15403. | NPV(A12,B12:F12) | |||||||||||

Yes,the company should purchase the saw. |

Best of Luck. God Bless

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