Question

In: Finance

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $854,400 is estimated to result in $284,800 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 $124,600. The press also requires an initial investment in spare parts inventory of $35,600, along with an additional $5,340 in inventory for each succeeding year of the project.

  

If the shop's tax rate is 24 percent and its discount rate is 11 percent, what is the NPV for this project?

Multiple Choice

  • $22,745.27

  • $25,241.83

  • $-73,528.05

  • $23,882.53

  • $21,608.00

Solutions

Expert Solution

We would first calculate the working capital required for each of the years.
Year 0 1 2 3 4
Working capital $35,600 $40,940 $46,280 $51,620 $56,960
Increase in working capital -$35,600 -$5,340 -$5,340 -$5,340 $51,620
Calculation of net present value is shown below
Year 0 1 2 3 4
Annual pretax cost savings $284,800.00 $284,800.00 $284,800.00 $284,800.00
Depreciation -$170,880.00 -$273,408.00 -$164,044.80 -$98,426.88
Income before taxes $113,920.00 $11,392.00 $120,755.20 $186,373.12
Taxes @ 24% -$27,340.80 -$2,734.08 -$28,981.25 -$44,729.55
Net income $86,579.20 $8,657.92 $91,773.95 $141,643.57
Add: Depreciation $170,880.00 $273,408.00 $164,044.80 $98,426.88
Cash flow from operations $257,459.20 $282,065.92 $255,818.75 $240,070.45
Initial investment -$854,400.00
Working capital -$35,600.00 -$5,340.00 -$5,340.00 -$5,340.00 $51,620.00
Salvage value $130,129.68
Net cash flow from operations -$890,000.00 $252,119.20 $276,725.92 $250,478.75 $421,820.13
Discount rate @ 14% (1/((1+r)^n) $1.00000 $0.90090 $0.81162 $0.73119 $0.65873
Present value -$890,000.00 $227,134.41 $224,596.96 $183,147.90 $277,865.98
Net present value $22,745.27
Thus, net present value for this project is $22,745.27.
Depreciation
854400*20% $170,880.00
854400*32% $273,408.00
854400*19.20% $164,044.80
854400*11.52% $98,426.88
Total depreciation $706,759.68
Calculation of after tax salvage value
Book value of asset $147,640 (854400-706759.68)
Less: Salvage value 124600
Loss on sale of asset $23,040
Tax benefit @ 24% $5,529.68
After tax salvage value $130,130 124600+5529.68

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