Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $64,262.00. The lathe...

Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $64,262.00. The lathe will generate revenues of $96,152.00 per year for five years. The cost of materials and labor needed to generate these revenues will total $48,052.00 per year, and other cash expenses will be $10,462.00 per year. The machine is expected to sell for $9,573.00 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Steamboat Springs' marginal tax rate is 38.00 percent, and its cost of capital is 12.00 percent. What is the NPV of the project?

Expert Solution

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Dep per anum = [ Cost - Salvage Value ] / Life

= [ 64262 - 0 ] / 5

= 64262 / 5

= 12852.4

After Tax sale vlue = Sale Value ( 1 - Tax Rate )

= 9573 * ( 1 - 0.38 )

= 9573 * 0.62

= 5935.26

CF = PAT + Dep

Year	Particulars	Initial Cost	Revenue	Mat & Lab	Cash Exp	Dep	PBT	Tax	PAT	CF	PVF @12%	Disc CF
0	Initial Cost	$ -64,262.00								$ -64,262.00	1.0000	$ -64,262.00
1	Operating CF		$ 96,152.00	$ 48,052.00	$ 10,462.00	$ 12,852.40	$ 37,638.00	$ 14,302.44	$ 23,335.56	$ 36,187.96	0.8929	$ 32,310.68
2	Operating CF		$ 96,152.00	$ 48,052.00	$ 10,462.00	$ 12,852.40	$ 37,638.00	$ 14,302.44	$ 23,335.56	$ 36,187.96	0.7972	$ 28,848.82
3	Operating CF		$ 96,152.00	$ 48,052.00	$ 10,462.00	$ 12,852.40	$ 37,638.00	$ 14,302.44	$ 23,335.56	$ 36,187.96	0.7118	$ 25,757.88
4	Operating CF		$ 96,152.00	$ 48,052.00	$ 10,462.00	$ 12,852.40	$ 37,638.00	$ 14,302.44	$ 23,335.56	$ 36,187.96	0.6355	$ 22,998.10
5	Operating CF		$ 96,152.00	$ 48,052.00	$ 10,462.00	$ 12,852.40	$ 37,638.00	$ 14,302.44	$ 23,335.56	$ 36,187.96	0.5674	$ 20,534.02
5	After Tax Salvage Value									$ 5,935.26	0.5674	$ 3,367.83
NPV	$ 69,555.32

Pls do rate, if the answer is correct and comment, if any further assistance is required.

jeff jeffy answered 2 years ago

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