In: Finance
Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $385,000 is estimated to result in $145,000 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 $45,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $3,100 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and its discount rate is 9 percent. Refer to Table 10.7. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) (NOTE: show CF function inputs to find the NPV) Should the company buy and install the machine press? Yes No
Time line | 0 | 1 | 2 | 3 | 4 | 5 | |||
Cost of new machine | -385000 | ||||||||
Initial working capital | -20000 | ||||||||
=Initial Investment outlay | -405000 | ||||||||
5 years MACR rate | 20.00% | 32.00% | 19.20% | 11.52% | 11.5200% | 0.0576 | 0 | ||
Savings | 145000 | 145000 | 145000 | 145000 | 145000 | ||||
-Depreciation | =Cost of machine*MACR% | -77000 | -123200 | -73920 | -44352 | -44352 | 22176 | =Salvage Value | |
-working capital to be maintained | -3100 | -3100 | -3100 | -3100 | -3100 | ||||
=Pretax cash flows | 64900 | 18700 | 67980 | 97548 | 97548 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 50622 | 14586 | 53024.4 | 76087.44 | 76087.44 | |||
+Depreciation | 77000 | 123200 | 73920 | 44352 | 44352 | ||||
=after tax operating cash flow | 127622 | 137786 | 126944.4 | 120439.44 | 120439.44 | ||||
reversal of working capital | 35500 | ||||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 35100 | |||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 4878.72 | |||||||
=Terminal year after tax cash flows | 75478.72 | ||||||||
Total Cash flow for the period | -405000 | 127622 | 137786 | 126944.4 | 120439.44 | 195918.16 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.09 | 1.1881 | 1.295029 | 1.4115816 | 1.538624 | ||
Discounted CF= | Cashflow/discount factor | -405000 | 117084.4 | 115971.72 | 98024.369 | 85322.336 | 127333.36 | ||
NPV= | Sum of discounted CF= | 138736.189 |
Buy press as NPV is positive