Question

In: Finance

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...

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

Solutions

Expert Solution

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

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