Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,142,400 is estimated to result in $380,800 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 $166,600. The press also requires an initial investment in spare parts inventory of $47,600, along with an additional $7,140 in inventory for each succeeding year of the project.

  

Required :If the shop's tax rate is 35 percent and its discount rate is 16 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

Answer 1

Operating cashflows
			1	2	3	4	5
Pre tax savings			380800	380800	380800	380800	380800
Less: Depreciation			228480.00	365568.00	219340.80	131604.48	131604.48
Before tax Income			152320.00	15232.00	161459.20	249195.52	249195.52
Less: Tax @ 35%			53312	5331.2	56510.72	87218.43	87218.43
After tax Income			99008.00	9900.80	104948.48	161977.09	161977.09
Add: Dep			228480.00	365568.00	219340.80	131604.48	131604.48
Operating cashflows			327488.00	375468.80	324289.28	293581.57	293581.57
After taxx salvage:
Sale value of assets				166600
Book value (1142400*5.76%)				65802
Loss on sale				100798
Tax shield @ 35%				35279.3
After tax salvage				201879.3
NPV
			0	1	2	3	4	5
Initial investment			-1142400
Working capital investment			-47600	-7140
Operating cashflows				327488.00	375468.80	324289.28	293581.57	293581.57
After tax salvage								201879.3
Release of WC								54740
Cashflows			-1190000	320348.00	375468.80	324289.28	293581.57	550200.9
PVF at 16%			1	0.862069	0.743163	0.640658	0.552291	0.476113
Present value'NPV			-1190000	276162.1	279034.5	207758.4	162142.5	261957.8
NPV			-2945
Answer is ($ 2945)