In: Finance
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 rate
is 34 percent, and its opportunity cost of capital is 10.30
percent.
What is the project's NPV?
Should they accept the project?
Calculate the projects NPV as follows:
Therefore, the Net present value is $91,220.52.
As the NPV of the project is positive. They can accept the project.
Formulas: