Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $892,800 is estimated to result in $297,600 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $130,200. The press also requires an initial investment in spare parts inventory of $37,200, along with an additional $5,580 in inventory for each succeeding year of the project.

  

Required :

If the shop's tax rate is 33 percent and its discount rate is 8 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

  

Answer 1

NPV = 63,472.62

Formula	Year (n)	0	1	2	3	4
	Initial investment (II)	892,800
	Savings (S)		297,600	297,600	297,600	297,600
5-year MACRS depreciation	Depreciation rate ('r)		20.00%	32.00%	19.20%	11.52%
II*r	Depreciation (D)		178,560	285,696	171,418	102,851
S-D	EBIT		119,040	11,904	126,182	194,749
33%*EBIT	Tax @ 33%		39,283	3,928	41,640	64,267
EBIT-Tax	Net income (NI)		79,757	7,976	84,542	1,30,482
	Add: depreciation (D)		178,560	2,85,696	1,71,418	1,02,851
NI + D	Operating Cash Flow (OCF)		258,317	293,672	255,960	233,333
Recovery of NWC in year 4	Increase in NWC	(37,200)	(5,580)	-	-	42,780
	Salvage value (sv)					130,200
II - total depreciation expense over 4 years	Book value (bv)					154,276
sv - bv	Gain on sale (g)					(24,076)
sv - (g*33%)	After-tax salvage value (ASV)					138,145
OCF + Increase in NWC + ASV	Free Cash Flow (FCF)	(930,000)	252,736.80	293,671.68	255,959.81	414,257.71
1/(1+d)^n	Discount factor @ 8%	1.000	0.926	0.857	0.794	0.735
FCF*Discount factor	PV of FCF	(930,000)	234,015.56	251,776.13	203,189.15	304,491.79
Sum of all PVs	NPV	63,472.62