Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $61,068.00. The lathe...

Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $61,068.00. The lathe will generate revenues of $95,157.00 per year for five years. The cost of materials and labor needed to generate these revenues will total $50,914.00 per year, and other cash expenses will be $10,574.00 per year. The machine is expected to sell for $8,753.00 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 34.00 percent, and its cost of capital is 14.00 percent.

a) What is the project cash flow for the first year of the project?

b) What is the project cash flow for the second year?

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

d) What is the NPV of the project?

Solutions

Expert Solution

Project Cash flow Forecast	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5

Revenues		95157	95157	95157	95157	95157
Less-Cash Operating Expenses		61488	61488	61488	61488	61488
Less- Depreciation		12213.6	12213.6	12213.6	12213.6	12213.6
EBIT		21455.4	21455.4	21455.4	21455.4	21455.4
Less- Taxes @ 34%		7294.84	7294.84	7294.84	7294.84	7294.84
EBIT - Taxes + Depreciation		26374.16	26374.16	26374.16	26374.16	26374.16
Less- Investment in NWC	0	0	0	0	0	0
Less-Investment in Gross PPE	(61068)	0	0	0	0	0
Add- NSV from Asset		0	0	0	0	5776.98
Project Cash flow	(61068)	26374.16	26374.16	26374.16	26374.16	32151.14

a) What is the project cash flow for the first year of the project?

ANSWER = 26374.16

b) What is the project cash flow for the second year?

ANSWER = 26374.16

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

ANSWER = 32151.14

d) What is the NPV of the project?

ANSWER = 32477.02

Project Cash flow	(61068)	26374.16	26374.16	26374.16	26374.16	32151.14
Present Value factor (14%)	1	0.877193	0.769468	0.674972	0.59208	0.519369
Present value of cash flows	-61068	23135.23	20294.06	17801.81	15615.62	16698.3
NET PRESENT VALUE	32477.02

jeff jeffy answered 11 months ago

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