Question
Snowy Hills Lumber Ltd is considering purchasing a new wood saw that costs $50 000. The saw will generate revenues of $100 000 per year
Snowy Hills Lumber Ltd is considering purchasing a new wood saw that costs $50 000. The saw will generate revenues of $100 000 per year for 5 years. The cost of materials and labour 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 $1000 at the end of its 5-year life and will be depreciated on a straightline basis over 5 years to zero. Snowy Hills Lumbers tax rate is 30 per cent, and its opportunity cost of capital is 10 per cent. Should the company purchase the saw? Explain why or why not.
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