Question
In: Finance
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $60,000. The saw will...
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.)
Excel Template (Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you’ve been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.)
NPV =?
Solutions
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 = [ 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.
jeff jeffy answered 1 year agoRelated Solutions
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $80,000. The saw will...
Crane Lumber, Inc., is considering purchasing a new wood saw
that costs $80,000. 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 $2,700 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...
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $45,000. The saw will...
Crane Lumber, Inc., is considering purchasing a new wood saw
that costs $45,000. 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 $1,400 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...
Rocky Mountain Sports Ltd is considering purchasing a new machine that costs $60,000. The machine will...
Rocky Mountain Sports Ltd is considering purchasing a new
machine that costs $60,000. The machine will generate revenues of
$100,000 per year for five years. The cost of materials and labour
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 $2,500 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...
Rocky Mountain Sports Ltd is considering purchasing a new machine that costs $60,000. The machine will...
Rocky Mountain Sports Ltd is considering purchasing a new
machine that costs $60,000. The machine will generate revenues of
$100,000 per year for five years. The cost of materials and labour
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 $2,500 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...
Mars Inc. is considering the purchase of a new machine that costs $60,000. This machine will...
Mars Inc. is considering the purchase of a new machine that
costs $60,000. This machine will reduce manufacturing costs by
$5,000 annually. Mars will use the MACRS accelerated method (shown
below) to depreciate the machine, and it expects to sell the
machine at the end of its 5-year life for $10,000. The firm expects
to be able to reduce net operating working capital by $15,000 when
the machine is installed, but the net working capital will return
to the original...
Mars Inc. is considering the purchase of a new machine that costs $60,000. This machine will...
Mars Inc. is considering the purchase of a new machine that
costs $60,000. This machine will reduce manufacturing costs by
$5,000 annually. Mars will use the MACRS accelerated method (shown
below) to depreciate the machine, and it expects to sell the
machine at the end of its 5-year life for $10,000. The firm expects
to be able to reduce net operating working capital by $15,000 when
the machine is installed, but the net working capital will return
to the original...
A company is considering purchasing a new machine that would cost $60,000 and the machine would...
A company is considering purchasing a new machine that would
cost $60,000 and the machine would be depreciated (straight line)
down to $0 over its four year life. At the end of four years it is
believed that the machine could be sold for $12,000. The machine
would increase EBDT by $42,000 annually. the company's marginal tax
rate is 34%.
What the RATFCF’s associated with the purchase of this
machine?
$31,800
$32,820
$30,452
$29,940
Finning Corporation is considering purchasing a new trailer for its operations for $60,000. The Manager has...
Finning Corporation is considering purchasing a new trailer for
its operations for $60,000. The Manager has put together an
estimate of anticipated financials:
Initial cost $60,000
Estimated useful life 8 years
Annual Depreciation $4,500
Net annual cash inflows $10,990
Net annual cash outflows $ 3,000
Overhaul costs (end of year 4) $5,990
Salvage value $12,000
Prior to moving forward with the purchase, the owner of the company
looked at the analysis and realized that there were some intangible
benefits that...
Washington Mill Works is considering purchasing a large resawing band saw for $30,000. The saw has...
Washington Mill Works is considering purchasing a large resawing
band saw for $30,000. The saw has a useful life estimated to be
seven years, at which point it will have an estimated salvage value
of $8,000. Annual income each year for the 7 years is $9000. Annual
operating expenses are $3,000. Assume MARR = 7.5% and the planning
horizon is 7 years. What is the present worth, annual worth, future
worth, internal/external rate of return?
Please answer all parts. Include...
Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $63,486.00. The lathe...
Steamboat Springs Furniture, Inc., is considering purchasing a new
finishing lathe that costs $63,486.00. The lathe will generate
revenues of $96,490.00 per year for five years. The cost of
materials and labor needed to generate these revenues will total
$50,599.00 per year, and other cash expenses will be $10,949.00 per
year. The machine is expected to sell for $9,903.00 at the end of
its five-year life and will be depreciated on a straight-line basis
over five years to zero. Steamboat...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 1. Draw an exposure diagram to illustrate a firm’s exposure to interest rate risk if the...
- During the latter third of the nineteenth century, leaders of the European “great powers” managed to...
- Consider an electrolytic cell consisting of molten AlCl3 for the following questions: (a) How many g...
- As you learned, mergers and acquisitions can be beneficial for companies (and sometimes, less than beneficial)....
- Stock X has a beta of 0.88 and an expected return of 10.8 percent. Stock Y...
- 1.What is the relation between Leader-Member Exchange and diverse team turnover/performance?
- Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects...
ADVERTISEMENT