Question

Problem 10-21 Cost-Cutting Proposals [LO2]

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $420,000 is estimated to result in $166,000 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 $66,000. The press also requires an initial investment in spare parts inventory of $27,000, along with an additional $3,450 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and its discount rate is 9 percent. (MACRS schedule)

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

Solution :-

Book value after 4 Years of Machine = $420,000 * ( 1.00 - 0.20 - 0.32 - 0.1920 - 0.1152 )

= $420,000 * 0.1728

= $72,576

Machine Sold = $66,000

Loss on Sale =$72,576 - $66,000 = $6,576

Now Tax Saving on loss on sale = $6576 * 0.22 = $1446.72

Now Salvage Value = $660,000 + $1446.72 = $67,446.72

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