Question
In: Finance
Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
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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. |
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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
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$23,882.53
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$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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