Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $547,200 is estimated to result in $182,400 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 $79,800. The press also requires an initial investment in spare parts inventory of $22,800, along with an additional $3,420 in inventory for each succeeding year of the project. Required : If the shop's tax rate is 30 percent and its discount rate is 19 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

$-89,116.88

$-86,914.71

$-136,234.52

$-93,572.73

$-84,661.04

Answer 1

Initial Investment = $547,200
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $547,200
Depreciation Year 1 = $109,440.00

Depreciation Year 2 = 32.00% * $547,200
Depreciation Year 2 = $175,104.00

Depreciation Year 3 = 19.20% * $547,200
Depreciation Year 3 = $105,062.40

Depreciation Year 4 = 11.52% * $547,200
Depreciation Year 4 = $63,037.44

Book Value at the end of Year 4 = $547,200.00 - $109,440.00 - $175,104.00 - $105,062.40 - $63,037.44
Book Value at the end of Year 4 = $94,556.16

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $79,800.00 - ($79,800.00 - $94,556.16) * 0.30
After-tax Salvage Value = $84,226.848

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$547,200 - $22,800
Net Cash Flows = -$570,000

Year 1:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $182,400 * (1 - 0.30) + 0.30 * $109,440
Operating Cash Flow = $160,512

Net Cash Flows = Operating Cash Flow - Investment in NWC
Net Cash Flows = $160,512 - $3,420
Net Cash Flows = $157,092

Year 2:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $182,400 * (1 - 0.30) + 0.30 * $175,104
Operating Cash Flow = $180,211.20

Net Cash Flows = Operating Cash Flow - Investment in NWC
Net Cash Flows = $180,211.20 - $3,420
Net Cash Flows = $176,791.20

Year 3:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $182,400 * (1 - 0.30) + 0.30 * $105,062.40
Operating Cash Flow = $159,198.72

Net Cash Flows = Operating Cash Flow - Investment in NWC
Net Cash Flows = $159,198.72 - $3,420
Net Cash Flows = $155,778.72

Year 4:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $182,400 * (1 - 0.30) + 0.30 * $63,037.44
Operating Cash Flow = $146,591.232

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $146,591.232 + $33,060 + $84,226.848
Net Cash Flows = $263,878.08

Required Return = 19%

NPV = -$570,000 + $157,092/1.19 + $176,791.20/1.19^2 + $155,778.72/1.19^3 + $263,878.08/1.19^4
NPV = -$89,116.88