In: Finance
1.
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $883,200 is estimated to result in $294,400 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 $128,800. The press also requires an initial investment in spare parts inventory of $36,800, along with an additional $5,520 in inventory for each succeeding year of the project. |
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If the shop's tax rate is 34 percent and its discount rate is 8 percent, what is the NPV for this project? (Do not round your intermediate calculations.) 2.
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1)
Depreciation | |||||
Year | Rate | Depreciation = $883200 x Dep. Rate | |||
1 | 20.00% | $176,640.00 | |||
2 | 32.00% | $282,624.00 | |||
3 | 19.20% | $169,574.40 | |||
4 | 11.52% | $101,744.64 | |||
Total Depreciation | $730,583.04 | ||||
The book value of the equipment at the end of the project = $883,200 - $730,583.04 | $152,616.96 | ||||
After-tax salvage value = $128,800 + ($152,616.96 – 128,800)(0.34) | $136,897.77 | ||||
Year | 0 | 1 | 2 | 3 | 4 |
Annual pretax cost savings | $294,400.00 | $294,400.00 | $294,400.00 | $294,400.00 | |
Less: Depreciation | -$176,640.00 | -$282,624.00 | -$169,574.40 | -$101,744.64 | |
EBT | $117,760.00 | $11,776.00 | $124,825.60 | $192,655.36 | |
Less: Tax @ 34% | -$40,038.40 | -$4,003.84 | -$42,440.70 | -$65,502.82 | |
Net Income | $77,721.60 | $7,772.16 | $82,384.90 | $127,152.54 | |
Add: Depreciation | $176,640.00 | $282,624.00 | $169,574.40 | $101,744.64 | |
Operating Cash Flow | $254,361.60 | $290,396.16 | $251,959.30 | $228,897.18 | |
Initial Investment | -$883,200.00 | ||||
Net Working Capital | -$36,800.00 | -$5,520.00 | -$5,520.00 | -$5,520.00 | $53,360.00 |
After Tax Salvage Value | $136,897.77 | ||||
Net Operating Cash Flow | -$920,000.00 | $248,841.60 | $284,876.16 | $246,439.30 | $419,154.94 |
PV @ 8% | 1 | 0.9259 | 0.8573 | 0.7938 | 0.7350 |
Present Value | -$920,000.00 | $230,408.89 | $244,235.39 | $195,631.46 | $308,091.40 |
NPV | $58,367.14 | ||||