Question

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $490,847 is estimated to result in some amount of annual pretax cost savings. The press will have an aftertax salvage value at the end of the project of $86,695. The OCFs of the project during the 4 years are $175,493, $191,453, $170,805 and $167,265, respectively. The press also requires an initial investment in spare parts inventory of $25,940, along with an additional $3,284 in inventory for each succeeding year of the project. The shop's discount rate is 6 percent. What is the NPV for this project?

Answer 1

Solution

	Year 0	Year 1	Year 2	Year 3	Year 4
Machine cost	(490,847)
Investment is sapres	(25,940)
Aftertax salvage value					86,695
Opearting cash flow		175,493	191,453	170,805	167,265
Inventory Investment		(3,284)	(3,284)	(3,284)	(3,284)
Total cash flow		172,209	188,169	167,521	250,676
Discounting factor@6%	1	0.943	0.890	0.840	0.792
PV Of Cash Flows	(516,787)	162,461	167,470	140,654	198,559
NPV	152,357
So NPV of the project is	$        152,357