Question 1: Capital Budgeting wood saw that Northland Timber Company (NTC) is co

Question

Question 1: Capital Budgeting wood saw that Northland Timber Company (NTC) is considering purchasing a new costs $50,000. Th e saw will generate revenues of $100.000 per annum for five years. nnum respectively. Maintenance and other cash expenses um. The machine is expected to sell for $5,000 at the end of its ply the wood saw The cost of labour and electricity needed to generate these revenues will amount to $45,000 and $15,000 per a will be $10,000 per ann five-year life and will be depreciated on a straight-line basis over five years to zero. NC expects that it will need to hold additional inventories of timber to sup he $5,000 of the project. The corporate tax rate is 28% and NTC's cost of capital is increase in inventories will occur in year 0 and be recovered in the final year 0 T A below to determine the project cash flow. Use pencil so that it is easy to correct errors. (8 marks) WORKSHEET A Year 3 Revenues Labour Electricity Other Expenses Depreciation Net Profit before Tax Corporate Tax Net Profit after Tax / Depreciation Operating Net Cash inflow Initial Investment Terminal Cash Flow 1441144do 1 1440D | 14400 1144a2 Change in Working Capital SooD Project Cash Flow (b) Calculate the net present value (NPV) and payback period for the project. (3 marks)

Explanation / Answer

The terminal cash flow has been computed by subtracting tax from the expected selling price of the machine at the end of its five-year life.

It is given in the question that the machine is expected to sell for $5,000 at the end of its five-year life.

Tax rate is 28%

Therefore,

Tax = $5,000 x 28% = $1,400

Thus,

Terminal cash flow = Expected selling price of the machine - Tax

= $5,000 - $1,400

= $3,600

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.