Question

Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $570,000 is estimated to result in $240,000 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 $96,000. The press also requires an initial investment in spare parts inventory of $30,000, along with an additional $3,500 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. Refer to the MACRS schedule. what is the NPV

Answer 1

Annual cashflows
		Year-1	Year-2	Year-3	Year-4
Annual pretax savings		240000	240000	240000	240000
Less: Dep		114000	182400	109440	65664
		(570000*20%)	(570000*32%)	(570000*1920%)	(570000*11.52%)
Net Income before tax		126000	57600	130560	174336
Less: Tax @ 30%		37800	17280	39168	52300.8
After tax Income		88200	40320	91392	122035.2
Add: Depreciation		114000	182400	109440	65664
Annual cashflows		202200	222720	200832	187699.2
NPV
		Year-0	Year-1	Year-2	Year-3	Year-4
Initial investmenet		-570000
Working capital investment		-30000	-3500
Annual cashflows			202200	222720	200832	187669
Working capital release						33500
After tax salvage value						76749
Net cashflows		-600000	198700	222720	200832	297918
PVF at 8%		1	0.925926	0.857339	0.793832	0.73503
Present value of cashflows		-600000	183981.5	190946.5	159426.9	218978.6
NPV		153333.5
Note:
After tax salvage value
Book value (570000*17.28%)			98496
Sale value			96000
Loss on sale			2496
Tax shield on loss			748.8
Add: Sale value			96000
After taxx salvage value			96748.8