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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 Springs' marginal tax rate is 38.00 percent, and its cost of capital is 13.00 percent.

What is the project cash flow for the second year?

What is the project cash flow for the last year of the project? (HINT: Add project cash flow plus the terminal value)

What is the NPV of the project?

Expert Solution

1. Project cash flow for second year = $26,771.08

2. Project cash flow for the last year of the project = $32,910.94

3. NPV of the project = $34,006.54

Working Notes and calculations:

Cost of machine = $63,486

Therefore Depreciation = $63,486 / 5 = 12,697.20 per year.

Savings in Depreciation due to taxation = Depreciation * Tax Rate = 12,697.20 * 38% = $4,824.94 Per year.

Income Before Tax = $96,490 - 50599 - 10,494 = $35,397 Per year.

Income After Tax = $35,397 - 38% of 35,394 = $21,946.14 Per year.

Net Operating Cash flow per year will be Income after tax plus savings in depreciation.

Now we need to find the cash flow after tax from the sale of machine.

We know that book value of the machine is zero, since we fully depreciated the machine.

So the whole amount of sale value of $9,903 is gain.

Tax on gain = 9,903 * 38% = $3,763.14

Cash flow after tax of machine = $6,139.86

NPV = Sum of Discounted Cash Inflow - Cash outflow.

NPV = $97,492.54 - $63,486.00 = $34,006.54

We get discounted cash flow when we multiply cash flow with discount factor.

Formula for Discount factor:

Where,
i = rate of return (0.13)
n = number of periods (1,2,3,4,5)

jeff jeffy answered 2 years ago

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