Question

Disraeli Gears Inc. manufactures latke-shaped gears. The company is considering the purchase of a new machine press for $614,400. The press has a four-your life and is estimated to result in $204,800 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 $89,600. The press also requires an initial investment of $25,600 in spare parts for inventory. An additional $3,840 in inventory will be required for each succeeding year of the project. All investments in inventory will be recovered at the end of the project.

If the shop's tax rate is 34 percent and its discount rate is 11 percent, what is the NPV for this project? (Do not round your intermediate calculations.) HINT: Calculate the depreciation for each year and use it to get the after tax-salvage value. Next, calculate OCF using the annual depreciation and then construct CFFA for each year. Now discount all cash flows to get the NPV.

Answer 1

Ref	Particulars		Year 1	Year 2	Year 3	Year 4
a	Operating cash flow		$     204,800.00	$            204,800.00	$    204,800.00	$    204,800.00
	Gain/(loss) on sale of asset					$     (16,568.32)
b	Depreciation		$   (122,880.00)	$           (196,608.00)	$   (117,964.80)	$     (70,778.88)
c=a-b	Profit before tax		$       81,920.00	$                 8,192.00	$      86,835.20	$    117,452.80
	Less: taxes		$       27,852.80	$                 2,785.28	$      29,523.97	$      39,933.95
	Profit after tax		$       54,067.20	$                 5,406.72	$      57,311.23	$      77,518.85
	Add: depreciation		$     122,880.00	$            196,608.00	$    117,964.80	$      70,778.88
	Gain/(loss) on sale of asset				$                     -	$      16,568.32
	Add: sale proceeds and working capital		$        (3,840.00)	$               (3,840.00)	$       (3,840.00)	$    126,720.00
	Cash flow after tax		$     173,107.20	$            198,174.72	$    171,436.03	$    291,586.05
d	Present value factor@ 11.0%		0.900900901	0.811622433	0.731191381	0.658730974
e=c*d	Present value of annual cashflows		$     155,952.43	$            160,843.05	$    125,352.55	$    192,076.76
	Total present value of annual cash inflows		$     634,224.79
	Less: investment		$     614,400.00
	Working capital		$       25,600.00
	NPV		$        (5,775.21)

NPV is negative (5,775.21)