Question

Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $510,000 is estimated to result in $210,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $86,000. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $2,900 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. (MACRS schedule)

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

Calculation of depreciation over project

Year	MACRS rate	Depreciation
1	0.2	102000
2	0.32	163200
3	0.192	97920
4	0.1152	58752
	total	421872

Book value at end of project = $510000 - $421872= $88128

Loss on sale = $88128 - $86000 = $2128

After tax salvage value = 86000 + $2128 * 0.30 = $86638.4

Calculation of present value of cash flows

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4
Investment	-510000	-	-	-	-
NWC required	-24000	-2900	-2900	-2900	-2900
OCF	-	177,600	195,960	176,376	164,626
After tax salvage value	-	-	-	-	86,638.4
Net Cash flow	-534000	174700	193060	173476	248364.4
PVF @ 8%	1	0.925926	0.857339	0.793832	0.73502985
Present value	-534000	161759.3	165517.8	137710.8	182555.248

NPV = -534000 + 161759.3 + 165517.8 + 137710.8 + 182555.248 = +113543.18