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.

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