Answered step by step
Verified Expert Solution
Link Copied!
Question
1 Approved Answer

Due to high demand for wood, San Lorenzo Lumber is considering buying a new timber cutting machine to add to its existing stock. The machine

image text in transcribed
image text in transcribed
image text in transcribed
Due to high demand for wood, San Lorenzo Lumber is considering buying a new timber cutting machine to add to its existing stock. The machine will cost $360,000 to purchase and $20,000 for shipping and installation. Last year, the firm cleared an unused area in its timber mill to make space for the machine, at a cost of $8,000. The new cutting machine will allow the company to sell an additional 140,000 pieces of wood per year, at a price of $6 per piece. Variable costs, including timber, electricity and labor, are expected to add up to 60% of sales. To make best use of the new machine, the company will need to increase its inventory of timber logs by $25,000. Since the firm uses trade credit when purchasing raw timber, accounts payable will increase by $12,000. The cutting machine is expected to last 4 years and will then be sold for $35,000. It falls into the 3-year MACRS class, with depreciation rates as follows: The firm has a marginal tax rate (federal and state) of 34%. Year 1 2 3 4 Depreciation rate 33% 45% 15% 7% BAttempt 3/5 for 10 pts. Part 1 What is the initial (year-0) free cash flow from the project? Choose the right sign. p+ decimals Submit Part 2 What is the free cash flow in year 1? B Attempt 1/5 for 10 pts. Part 2 What is the free cash flow in year 1? 264396 Correct In year 1, capital expenditure and the change in net operating working capital are zero. Dep = 0.33 380,000 = 125,400 EBIT = Revenue - Costs - Depreciation = P Q-0.6 P Q - Depreciation = 6*140,000 - 0.6*6*140,000 - 125,400 = 210,600 FCF = NOPAT + DEP - CAPEX - ANOWC = EBIT (1-t) + Dep. - CAPEX - ANOWC = 210,600 (1-0.34) + 125,400-0-0 = 264,396 Part 3 What is the free cash flow in year 2? 0+ decimals Submit BAttempt 1/5 for 10 F BAttempt 3/5 for 10 pts. Part 3 What is the free cash flow in year 2? 0+ decimals Submit Part 4 What is the free cash flow in year 3? 0+ decimals Submit BAttempt 3/5 for 10 pts. B Attempt 2/5 for 10 pts

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image
Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

HSBA Handbook On Ship Finance

Authors: Schinas

2015th Edition

3662434091, 978-3662434093

More Books

Students explore these related Finance questions