Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $768,000 is estimated to result in $256,000 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 $112,000. The press also requires an initial investment in spare parts inventory of $32,000, along with an additional $4,800 in inventory for each succeeding year of the project.

  

Required :

If the shop's tax rate is 33 percent and its discount rate is 16 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

Answer 1

	0	1	2	3	4
Pretax cost savings		$      2,56,000	$    2,56,000	$    2,56,000	$   2,56,000
Depreciation		$      1,53,600	$    2,45,760	$    1,47,456	$       88,474
Incremental NOI		$      1,02,400	$        10,240	$    1,08,544	$   1,67,526
Tax at 33%		$         33,792	$          3,379	$        35,820	$       55,284
NOPAT		$         68,608	$          6,861	$        72,724	$   1,12,243
Add: Depreciation		$      1,53,600	$    2,45,760	$    1,47,456	$       88,474
Incremental OCF		$      2,22,208	$    2,52,621	$    2,20,180	$   2,00,716
Capital expenditure	$     7,68,000				$ -1,18,834	[See note below for after tax salvage value]
Change in NWC	$         32,000	$            4,800	$          4,800	$          4,800	$     -46,400
FCF	$   -8,00,000	$      2,17,408	$    2,47,821	$    2,15,380	$   3,65,951
PVIF at 16%	1	0.86207	0.74316	0.64066	0.55229
PV at 16%	$   -8,00,000	$      1,87,421	$    1,84,171	$    1,37,985	$   2,02,111
NPV	$       -88,312
After tax salvage value:
Salvage value at EOY 4	112000
Book value = 768000*17.28% =	132710
Loss on sale	20710
Tax shield on loss at 33%	6834
After tax salvage value = 112000+6834 =	118834