Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $816,000 is estimated to result in $272,000 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 $119,000. The press also requires an initial investment in spare parts inventory of $34,000, along with an additional $5,100 in inventory for each succeeding year of the project.

  

Required :

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.)

Answer 1

Annual Operating cashflows:
			Year-1	Year-2	Year-3	Year-4
Annual Pre tax savings			272000	272000	272000	272000
Less: Depreciation			163200	261120	156672	94003.2
			(816000*20%)	(816000*32%)	(816000*19.20%)	(816000*11.52%)
Annual Income before tax			108800	10880	115328	177996.8
Less: tax @ 34%			36992	3699.2	39211.52	60518.91
After tax income			71808	7180.8	76116.48	117477.9
Add: Depreciation			163200	261120	156672	94003.2
Annual Operating cashflows			235008	268300.8	232788.5	211481.1
After tax Salvage value
Sales value of FA				119000
Book value of FA (816000*17.28%)				141004.8
Loss on sales				-22004.8
Tax shield on loss @ 34%				7482
After tax Salvage value			(119000+7482)	126482
Cashflows of each year:
			Year-0	Year-1	Year-2	Year-3	Year-4
Initial investment			-816000
Workin capital investment			-34000	-5100
Annual operating cashflows				235008	268301	232789	211481
After tax salvage							126482
WC release							39100
Cash flows			-850000	229908	268301	232789	377063
PVF at 11%			1	0.900901	0.811622	0.731191	0.658731
Present value of cashflowws			-850000	207124.3	217759.1	170213.3	248383.1
NPV			-6520