Rocky Mountain Lumber, Inc., is considering purchasing a new wood saw that costs

Question

Rocky Mountain Lumber, Inc., is considering purchasing a new wood saw that costs $65,000. 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. Rocky Mountain’s tax rate is 34 percent, and its opportunity cost of capital is 16.00 percent.

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

Should the company purchase the saw?

Explanation / Answer

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A B C D E F Year 0 1 2 3 4 5 1 Initial Cost 65000 2 Revenues 100000 100000 100000 100000 100000 3 Cost of Material and labour 60000 60000 60000 60000 60000 4 Cash Expenses 10000 10000 10000 10000 10000 5 Depreciation 13000 13000 13000 13000 13000 Depreciation =( Initial Cost-0)/5 6 EBT 17000 17000 17000 17000 17000 EBT = Revenues - Cost of Material and Labour - Cash expenses - Depreciation 7 Tax = EBIT * Tax Rate 5780 5780 5780 5780 5780 8 EAT = EBIT - Tax 11220 11220 11220 11220 11220 9 Depreciation 13000 13000 13000 13000 13000 10 After Tax Salvage Value 0 0 0 0 2310 Salvage Value*(1-tax rate) 11 Operating Cash Flow -65000 24220 24220 24220 24220 26530 (EAT+Depreciation+After Tax Salvage Value) 12 Discount Rate 16% NPV 15403. NPV(A12,B12:F12) Yes,the company should purchase the saw.

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