Question

Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $445,000 is estimated to result in $181,000 in annual pretax cost savings. The press qualifies for 100 percent bonus depreciation, and it will have a salvage value at the end of the project of $73,000. The press also requires an initial investment in spare parts inventory of $32,000, along with an additional $3,700 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and its discount rate is 11 percent.

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Hence, the NPV = $ 106,059.18