Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $950,400 is estimated to result in $316,800 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 $138,600. The press also requires an initial investment in spare parts inventory of $39,600, along with an additional $5,940 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.)

Answer choices:

$-143,024.24

$-139,300.41

$-227,934.08

$-150,175.45

$-135,873.03

Answer 1

Tax rate		32%
	Year-0	Year-1	Year-2	Year-3	Year-4
Contribution		316,800	316,800	316,800	316,800
Less: Depreciation as per table given below		190,080	304,128	182,477	109,486
Profit before tax		126,720	12,672	134,323	207,314
Tax		40,550	4,055	42,983	66,340
Profit After Tax		86,170	8,617	91,340	140,973
Add Depreciation		190,080	304,128	182,477	109,486
Cash Profit After tax		276,250	312,745	273,817	250,460
Cost of macine			950,400
Depreciation			786,171
WDV			164,229
Sale price			138,600
Profit/(Loss)			(25,629)
Tax			(8,201)
Sale price after tax			146,801
Depreciation		Year-1	Year-2	Year-3	Year-4		Total
Cost		950,400	950,400	950,400	950,400
Dep Rate		20.00%	32.00%	19.20%	11.52%
Deprecaition		190,080	304,128	182,477	109,486		786,171
Calculation of NPV
						18.00%
Year		Captial	Working captial	Operating cash	Annual Cash flow	PV factor	Present values
0		(950,400)	(39,600)		(990,000)	1.000	(990,000.00)
1			(5,940)	276,250	270,310	0.847	229,075.93
2			(5,940)	312,745	306,805	0.718	220,342.55
3			(5,940)	273,817	267,877	0.609	163,037.95
4		146,801	57,420	250,460	454,681	0.516	234,519.33
					Net Present Value		(143,024.24)
So option A is correct