In: Finance
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $806,400 is estimated to result in $268,800 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 $117,600. The press also requires an initial investment in spare parts inventory of $33,600, along with an additional $5,040 in inventory for each succeeding year of the project. Required : If the shop's tax rate is 33 percent and its discount rate is 16 percent, what is the NPV for this project? (Do not round your intermediate calculations.) rev: 09_18_2012
a. $-92,727.18
b. $-89,758.54
c. $-169,990.58
d. $-97,363.54
e. $-88,090.82
Year | 0 | 1 | 2 | 3 | 4 |
Initial investment | -806400 | ||||
Initial investment in spare parts inventory | -33600 | ||||
Addl.inv. | -5040 | -5040 | -5040 | -5040 | |
After-tax cash flow on salvage | 124776 | ||||
Recovery of NWC | 53760 | ||||
1.CAPEX cash flows | -840000 | -5040 | -5040 | -5040 | 173496 |
Opg. Cash flows: | |||||
Post-tax cost savings(268800*(1-33%) | 180096 | 180096 | 180096 | 180096 | |
Add: Depn. Tax shields(806400*Yrly. MACRS rate*Tax%) | 53222 | 85156 | 51094 | 30656 | |
2.Total annual Opg. Cash flow | 233318 | 265252 | 231190 | 210752 | |
3.Total annual cash flows(1+2) | -840000 | 228278 | 260212 | 226150 | 384248 |
PV F at 16%(1/1.16^n) | 1 | 0.86207 | 0.74316 | 0.64066 | 0.55229 |
PV at 16% | -840000 | 196792 | 193380 | 144884 | 212217 |
NPV | -92727.27 | ||||
Workings: | |||||
Carrying value at end of 4 yrs.(806400*(11.52%+5.76%)) | 139346 | 5-year MACRS rates | |||
Salvage | 117600 | 20 | |||
Loss on salvage(139346-117600) | 21746 | 32 | |||
Tax saved on loss(21746*33%) | 7176 | 19.2 | |||
After-tax cash flow on salvage(117600+7176)23480) | 124776 | 11.52 | |||
11.52 | |||||
5.76 | |||||
100 | |||||
ANSWER: NPV of this project= | |||||
a. $-92,727.18 | |||||