Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,113,600 is estimated to result in $371,200 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 $162,400. The press also requires an initial investment in spare parts inventory of $46,400, along with an additional $6,960 in inventory for each succeeding year of the project. If the shop's tax rate is 23 percent and its discount rate is 9 percent, what is the NPV for this project?

A. $ 90,832.98

B. $ 93,658.87

C. $ (43,900.23)

D. $ 95,374.63

E. $ 86,291.33

Answer 1

	MARCs Depreciation table
	Year	Rate	Depreciation	Accumulated Depreciation	Book Value
	0		$0.00	$0.00	$1,113,600.00
	1	20.00%	$222,720	$222,720	$890,880
	2	32.00%	$356,352	$579,072	$534,528
	3	19.20%	$213,811	$792,883	$320,717
	4	11.52%	$128,287	$921,170	$192,430
	5	11.52%	$128,287	$1,049,457	$64,143
	6	5.76%	$64,143	$1,113,600	$0
	year	0	1	2	3	4	NPV
	Initial investment	(1,113,600)
	Working capital	(46,400)	(6,960)	(6,960)	(6,960)	67,280
	Operating cash flow
	Saving in cost		371,200	371,200	371,200	371,200
	depreciation		222,720	356,352	213,811	128,287
	Profit before tax		148,480	14,848	157,389	242,913
	Tax @ 23%		34,150	3,415	36,199	55,870
	Net income		114,330	11,433	121,189	187,043
	Operating cash flow		337,050	367,785	335,001	315,330
	Post tax salvage value
	162400-(162400-192430)*23%				169306.9
	Net cash flow	(1,160,000)	330,090	360,825	328,041	551,917
	PVIF @ 9%	1	0.917431193	0.841679993	0.77218348	0.70842521
	Present value	(1,160,000)	302,834	303,699	253,308	390,992	$ 90,832.98
	answer =option A	$ 90,832.98