Answer :
The NPV of the project is $69.21 (rounded to 2 decimal places).
To calculate the net present value (NPV) of the project, we need to discount the cash flows to their present values and subtract the initial investment. The formula for NPV is as follows:
NPV = -Initial Investment + (Cash Flow Year 1 / (1 + Cost of Capital)^1) + (Cash Flow Year 2 / (1 + Cost of Capital)^2) + ... + (Cash Flow Year N / (1 + Cost of Capital)^N)
Where:
Initial Investment is the cost of the finishing lathe.
Cash Flow Year 1 to N represents the net cash flows generated by the project in each year.
Cost of Capital is the required rate of return or the cost of funds.
Let's calculate the NPV for the given scenario:
Initial Investment: $60,541.00
Year 1 Cash Flow = Revenues - (Material and Labor Costs + Other Cash Expenses) = $97,022.00 - ($51,577.00 + $10,815.00) = $34,630.00
Year 2 to 4 Cash Flows = Revenues - (Material and Labor Costs + Other Cash Expenses) = $97,022.00 - ($51,577.00 + $10,815.00) = $34,630.00
Year 5 Cash Flow = Revenues + Salvage Value - (Material and Labor Costs + Other Cash Expenses) = $97,022.00 + $8,201.00 - ($51,577.00 + $10,815.00) = $42,831.00
Cost of Capital: 13.00% or 0.13
Now, let's calculate the NPV using the formula:
NPV = -$60,541.00 + ($34,630.00 / (1 + 0.13)^1) + ($34,630.00 / (1 + 0.13)^2) + ($34,630.00 / (1 + 0.13)^3) + ($42,831.00 / (1 + 0.13)^4) + ($42,831.00 / (1 + 0.13)^5)
NPV = -$60,541.00 + ($34,630.00 / (1 + 0.13)^1) + ($34,630.00 / (1 + 0.13)^2) + ($34,630.00 / (1 + 0.13)^3) + ($42,831.00 / (1 + 0.13)^4) + ($42,831.00 / (1 + 0.13)^5)
NPV = -$60,541.00 + ($34,630.00 / 1.13^1) + ($34,630.00 / 1.13^2) + ($34,630.00 / 1.13^3) + ($42,831.00 / 1.13^4) + ($42,831.00 / 1.13^5)
NPV = -$60,541.00 + ($34,630.00 / 1.13) + ($34,630.00 / 1.13^2) + ($34,630.00 / 1.13^3) + ($42,831.00 / 1.13^4) + ($42,831.00 / 1.13^5)
NPV = -$60,541.00 + $30,576.99 + $27,233.51 + $24,244.40 + $26,180.44 + $21,264.87
NPV = $-60,541.00 + $30,576.99 + $27,233.51 + $24,244.40 + $26,180.44 + $21,264.87
NPV = $69.21
Complete queston:
Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $60,54100. The lathe will generate revenues of $97,022.00 per year for five years. The cost of materials and labor needed to generate these revenues will total $51,577.00 per year, and other cash expenses will be S10,815.00 per year. The machine is expected to sell for $8,201.00 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 NPV of the project? round to 2 decimals
To know more on NPV:
https://brainly.com/question/31385035
#SPJ11
