Question

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 $3,500 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 10.90 percent.

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

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NPV =?

Answer 1

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 = [ Cost - Salvage Value ] / Life

= [ 60000 - 0 ] / 5

= 60000 / 5

= 12000

As Book value is Zero, entire salvage value is profit and subjected to tax.

After Tax salvage Value = Salvage Value * ( 1 - Tax rate )

= 3500 ( 1 - 0.34 )

= 3500 ( 0.66 )

= $ 2310

Year	Equip cost	After Tax Salvage Value	Sales	Cost	Other expe	Dep	PBT	Tax	PAT	CF	PVF @10.90%	Disc CF
0	$ -60,000.00									$ -60,000.00	1	$ -60,000.00
1			$ 1,00,000.00	$ 60,000.00	$ 10,000.00	$ 12,000.00	$ 18,000.00	$ 6,120.00	$ 11,880.00	$ 23,880.00	0.901713	$ 21,532.91
2			$ 1,00,000.00	$ 60,000.00	$ 10,000.00	$ 12,000.00	$ 18,000.00	$ 6,120.00	$ 11,880.00	$ 23,880.00	0.813087	$ 19,416.51
3			$ 1,00,000.00	$ 60,000.00	$ 10,000.00	$ 12,000.00	$ 18,000.00	$ 6,120.00	$ 11,880.00	$ 23,880.00	0.733171	$ 17,508.13
4			$ 1,00,000.00	$ 60,000.00	$ 10,000.00	$ 12,000.00	$ 18,000.00	$ 6,120.00	$ 11,880.00	$ 23,880.00	0.66111	$ 15,787.31
5		$ 2,310.00	$ 1,00,000.00	$ 60,000.00	$ 10,000.00	$ 12,000.00	$ 18,000.00	$ 6,120.00	$ 11,880.00	$ 26,190.00	0.596132	$ 15,612.69
NPV	$ 29,857.55

Year 1 to 4 CF = PAT + Dep

Year 5 CF = PAT+ Dep + After Tax Salvage Value

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