Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $854,400 is estimated to result in $284,800 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 $124,600. The press also requires an initial investment in spare parts inventory of $35,600, along with an additional $5,340 in inventory for each succeeding year of the project.

  

If the shop's tax rate is 22 percent and its discount rate is 11 percent, what is the NPV for this project?

Your firm is contemplating the purchase of a new $2,183,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $212,400 at the end of that time. You will be able to reduce working capital by $295,000 (this is a one-time reduction). The tax rate is 24 percent and your required return on the project is 20 percent and your pretax cost savings are $644,750 per year.

  

a. What is the NPV of this project? b. What is the NPV if the pretax cost savings are $895,500 per year? c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.8 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $294,000 after 3 years. The project requires an initial investment in net working capital of $420,000. The project is estimated to generate $3,360,000 in annual sales, with costs of $1,344,000. The tax rate is 23 percent and the required return on the project is 13 percent.      What is the project's year 0 net cash flow? What is the project's year 1 net cash flow? What is the project's year 2 net cash flow? What is the project's year 3 net cash flow? What is the NPV?

Answer 1

1)