Question

Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $405,000 is estimated to result in $157,000 in annual pretax cost savings. The press qualifies for 100 percent bonus depreciation, and it will have a salvage value at the end of the project of $57,000. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $3,300 in inventory for each succeeding year of the project. The shop’s tax rate is 24 percent and its discount rate is 11 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

	Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Total
a	Cost Savings		157000	157000	157000	157000
b	Depreciation		100000	0	0	0
c	Opearating Profit (a-b)		57000	157000	157000	157000
d	tax @ 24%		13680	37680	37680	37680
e	Depreciation		100000	0	0	0
f	Cash flows (c - d + e)		143320	119320	119320	119320
g	salvage value		0	0	0	57000
h	inventory	24000	3300	3300	3300	3300
i	Discouting factor @11%		0.900900901	0.811622433	0.731191381	0.658730974
j	PV of cash flows (f * i)		129117.12	96842.79	87245.76	78599.78	391805.44
k	PV of salvage value (g * i)		0.00	0.00	0.00	37547.67	37547.67
l	PV of inventory (h * i)		2972.97	2678.35	2412.93	2173.81	(10238.07)

NPV = PV of cash inflows - PV of cash outflows

= PV of cash flows + pv of salvage value + pv of inventory reversal - pv of machine - pv of inventory invested

= 391805.44 + 37545.67 + 24000*.6587 - 157000 - 24000 - 10238.07

= 391805.44 + 37545.67 + 15809.54 - 157000 - 24000 - 10238.07

= 253922.60