Question

What is the project's NPV?

Crane Lumber, Inc., is considering purchasing a new wood saw that costs $60,000. 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 $4,800 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 11.10 percent.

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-60000
=Initial Investment outlay		-60000
								100.00%
Sales			100000	100000	100000	100000	100000
Profits	Sales-variable cost		30000	30000	30000	30000	30000
-Depreciation	Cost of equipment/no. of years		-12000	-12000	-12000	-12000	-12000	0	=Salvage Value
=Pretax cash flows			18000	18000	18000	18000	18000
-taxes	=(Pretax cash flows)*(1-tax)		11880	11880	11880	11880	11880
+Depreciation			12000	12000	12000	12000	12000
=after tax operating cash flow			23880	23880	23880	23880	23880
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						3168
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							3168
Total Cash flow for the period		-60000	23880	23880	23880	23880	27048
Discount factor=	(1+discount rate)^corresponding period	1	1.111	1.234321	1.3713306	1.5235483	1.6926622
Discounted CF=	Cashflow/discount factor	-60000	21494.149	19346.669	17413.744	15673.937	15979.562
1. NPV=	Sum of discounted CF=	29908.1