Question

A)

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $509885 is estimated to result in $206540 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 $91777. The shop's tax rate is 34 percent. What is the OCF for year 4? (Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Modified ACRS Depreciation Allowances (Table 10.7)
Year	Three-Year	Five-Year	Seven-Year
1	33.33%	20.00%	14.29%
2	44.45	32.00	24.49
3	14.81	19.20	17.49
4	7.41	11.52	12.49
5		11.52	8.93
6		5.76	8.92
7			8.93
8			4.46

B)

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $534819 is estimated to result in some amount of annual pretax cost savings. The press will have an aftertax salvage value at the end of the project of $85560. The OCFs of the project during the 4 years are $173439, $195137, $176990 and $166535, respectively. The press also requires an initial investment in spare parts inventory of $23957, along with an additional $1751 in inventory for each succeeding year of the project. The shop's discount rate is 9 percent. What is the NPV for this project? (Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

A)

	Given in Question:	Amount $
a.	Operating Cash Flow (OCF = Earnings Before Interest & Taxes (EBIT) + Depreciation - Taxes) in Year 0	-
b.	Increase in Fixed Assets = Basic Price of Machine :
	Basic Price of Truck	5,09,885
	Total Net Capital Spending	5,09,885
	Since, this is an cash outflow, the sign is negative	-5,09,885
c.	Annual Savings	2,06,540
d.	Salvage Value	91,777
e.	MACRS rates for years 1-5
	Year 1	20.00%
	Year 2	32.00%
	Year 3	19.20%
	Year 4	11.52%
	Year 5	11.52%
	Year 6	5.76%
f.	Tax Rate	34%

	Operating Cash Flow (OCF) Calculations			Amounts in US $
S.No.	Particulars	Cf 0	Cf1	Cf2	Cf3	Cf4
A	Savingsfrom purchase of new machine	-	2,06,540	2,06,540	2,06,540	2,06,540
Less:
B.	Additional costs from new machine	-	-	-	-	-
C.	Depreciation on new machine	-	1,01,977	1,63,163	97,898	58,739
D.	Earnings Before Interest & Taxes (EBIT): A-B-C	-	1,04,563	43,377	1,08,642	1,47,801
E	Taxes @ 34%	-	35,551	14,748	36,938	50,252
F	Net After Tax Savings ( D - E)	-	69,012	28,629	71,704	97,549
G	Add: Depreciation	-	1,01,977	1,63,163	97,898	58,739
H	Operating Cash Flow (OCF) ( F + G) Answer	-	1,70,989	1,91,792	1,69,602	1,56,288
Less:
I	Change in Net Fixed Assets (See Note 1)	5,09,885	-	-		-90,530
J	Increase in Working Capital	-	-	-	-
K	Cash Flow From Assets ( H+I+J)	-5,09,885	1,70,989	1,91,792	1,69,602	2,46,817

Note 1	Calculation of Change in Net Fixed Assets ( Salvage Value) in year 4:
		Amount in US $
i	Salvage value	91,777
ii	Tax on Salvage Value - See Note 2	1,247
iii	Working Capital Returned (assumed as project concludes in year 3)	-
	Additional Cash Flow in Year 4 (i-ii+iii)	90,530
Note 2	Tax on Salvage value is computed as under:
	Salvage value	91,777
Less:
	Depreciation @ 11.52% & 5.76% in Year 5 & 6 on Basic Asset price $ 509,885	88,108
	Salvage Value less Depreciation	3,669
	Tax @ 34% on Salvage Value less Depreciation	1,247

Q B

	Given in Question:	Amount $
a.	Operating Cash Flow (OCF = Earnings Before Interest & Taxes (EBIT) + Depreciation - Taxes) in Year 0	-
b.	Increase in Fixed Assets = Basic Price of Machine :
	Basic Price of Truck	5,34,819
	Total Net Capital Spending	5,34,819
	Since, this is an cash outflow, the sign is negative	-5,34,819
c.	Initial Spares Inventory	23,957
d.	Salvage Value	91,777
f.	Shop's Discount Rate	9%
	Operating Cash Flow (OCF) Calculations			Amounts in US $
S.No.	Particulars	Cf 0	Cf1	Cf2	Cf3	Cf4
H	Operating Cash Flow (OCF) -Given	-	1,73,439	1,95,137	1,76,990	1,66,535
I	Additional working capital required (Spares Inv)		1,751	1,751	1,751	1,751
J	Net Cash Flow ( H-I)		1,71,688	1,93,386	1,75,239	1,64,784
Less:	Terminal Cash Flows:
K	Change in Net Fixed Assets (See Note 1)	5,34,819	-	-		-85,560
L.	Increase in Working Capital	23,957				-30,961
M.	Cash Flow From Assets ( H+I+J)	-5,58,776	1,73,439	1,95,137	1,76,990	2,83,056
N	Discounted Cash Flow	-5,58,776	1,59,118	1,64,243	1,36,669	2,00,524
O	Net Present Value (Sum of Discounted Cash Flows)	1,01,778	Answer