Question: QUESTION 17 Lofty Lumber Ltd is considering purchasing a new wood saw that costs $50,000. The saw will generate revenues of $120,000 per year for

QUESTION 17

Lofty Lumber Ltd is considering purchasing a new wood saw that costs $50,000. The saw will generate revenues of $120,000 per year for 5 years. The cost of materials and labour needed to generate these revenues will total $68,000 per year, and other cash expenses will be $14,000 per year. The machine is expected to be depreciated on a straight-line basis over 5 years to zero.

Lofty Lumbers opportunity cost of capital is 12 per cent.

Assume a tax rate is 30%.

Required

Calculate the annual depreciation expense of the new machine.

[2 marks]

Determine the operating cash flows from year 1 to year 5 for the new wood saw?

[4 marks]

Should Lofty Lumber purchase the saw based on their opportunity cost of capital of 12%? Why or why not?

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