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Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $56,099.00. The lathe will generate revenues of $97,975.00 per year for five years.

Answer :

Steamboat Springs Furniture, Inc. is considering purchasing a new finishing lathe for $56,099.00. This lathe is expected to generate annual revenues of $97,975.00 for five years.

To evaluate the financial feasibility of this investment, we need to calculate the net present value (NPV) of the lathe.

NPV is a financial metric used to determine the value of an investment by considering the time value of money. To calculate NPV, we need to discount the future cash flows (revenues) to their present value.

To do this, we'll need to know the discount rate or the company's cost of capital. Let's assume a discount rate of 10% for this example.

1. Calculate the present value of each year's revenue:
Year 1: $97,975.00 / (1 + 0.10) ^ 1
Year 2: $97,975.00 / (1 + 0.10) ^ 2
Year 3: $97,975.00 / (1 + 0.10) ^ 3
Year 4: $97,975.00 / (1 + 0.10) ^ 4
Year 5: $97,975.00 / (1 + 0.10) ^ 5

2. Sum up the present values of each year's revenue to get the total present value (PV) of the cash flows.

3. Calculate the NPV by subtracting the initial investment cost from the total present value:
NPV = Total PV of cash flows - Initial investment cost

If the NPV is positive, it means the investment is financially viable. If it's negative, it indicates that the investment may not generate sufficient returns to cover the cost.

In this case, let's calculate the present value of each year's revenue assuming a 10% discount rate:

Year 1: $97,975.00 / (1 + 0.10) ^ 1 = $89,068.18
Year 2: $97,975.00 / (1 + 0.10) ^ 2 = $80,971.07
Year 3: $97,975.00 / (1 + 0.10) ^ 3 = $74,519.15
Year 4: $97,975.00 / (1 + 0.10) ^ 4 = $68,654.68
Year 5: $97,975.00 / (1 + 0.10) ^ 5 = $63,325.16

Now, let's sum up the present values:

Total PV of cash flows = $89,068.18 + $80,971.07 + $74,519.15 + $68,654.68 + $63,325.16 = $376,537.24

Finally, let's calculate the NPV:

NPV = $376,537.24 - $56,099.00 = $320,438.24


Based on the calculations, the NPV of the investment in the new finishing lathe is $320,438.24. Since the NPV is positive, it suggests that the investment is financially viable. Steamboat Springs Furniture, Inc. can expect to generate positive returns and recover the initial investment cost. However, it's important to note that other factors such as market conditions and potential risks should also be considered before making a final decision.

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