Question

Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $430,000 is estimated to result in $172,000 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 $71,000. The press also requires an initial investment in spare parts inventory of $29,000, along with an additional $3,550 in inventory for each succeeding year of the project. The shop’s tax rate is 24 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

NPV is the present value of cash flows associated with the project

Cash outflow in year 0 = cost of machine + investment in inventory

Cash inflow in year 1 = annual pretax cost savings * (1 - tax rate) + depreciation tax shield - additional investment in inventory

Cash inflow in year 2 = annual pretax cost savings * (1 - tax rate) - additional investment in inventory

Cash inflow in year 3 = annual pretax cost savings * (1 - tax rate) - additional investment in inventory

Cash inflow in year 4 = annual pretax cost savings * (1 - tax rate) + recovery of investment in inventory + after tax salvage value

NPV is $102,740.32