Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,132,800 is estimated to result in $377,600 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 $165,200. The press also requires an initial investment in spare parts inventory of $47,200, along with an additional $7,080 in inventory for each succeeding year of the project. Required : If the shop's tax rate is 32 percent and its discount rate is 18 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

a. $-170,473.33

b. $-166,034.84

c. $-271,679.01

d. $-178,997.00

e. $-161,949.67

Answer 1

	0	1	2	3	4
Annual pretax savings		$       377,600.00	$     377,600.00	$       377,600.00	$   377,600.00	Total Depn	Book Value
-Depreciation		$       226,560.00	$     362,496.00	$       217,497.60	$   130,498.56	$   937,052.16	$     195,747.84
=Incremental NOI		$       151,040.00	$        15,104.00	$       160,102.40	$   247,101.44
-Tax at 32%		$          48,332.80	$          4,833.28	$          51,232.77	$      79,072.46
=Incremental NOPAT		$       102,707.20	$        10,270.72	$       108,869.63	$   168,028.98
+Depreciation		$       226,560.00	$     362,496.00	$       217,497.60	$   130,498.56
=Incremental OCF		$       329,267.20	$     372,766.72	$       326,367.23	$   298,527.54
-Capex	$         1,132,800.00
+After tax salvage value of new press machine = 165200+(195747-165200)*32% =					$   174,975.04
-Change in NWC	$               47,200.00	$            7,080.00	$          7,080.00	$            7,080.00	$   (68,440.00)
=FCF	$      (1,180,000.00)	$       322,187.20	$     365,686.72	$       319,287.23	$   541,942.58
PVIF at 18%	$                  1.00000	$             0.84746	$           0.71818	$             0.60863	$         0.51579
PV of FCF = FCF*PVIF at 18% =	$      (1,180,000.00)	$       273,040.00	$     262,630.51	$       194,328.07	$   279,527.95
NPV [Sum of PV of FCF of years 0 to 4]	$          (170,473.47)
Answer: [a] -$170,473.33
[Marginal difference in solution due to difference in
rounding off]