Question

Disraeli Gears Inc. manufactures latke-shaped gears. The company is considering the purchase of a new machine press for $1,142,400. The press has a four-your life and 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 of $47,600 in spare parts for inventory. An additional $7,140 in inventory will be required for each succeeding year of the project. All investments in inventory will be recovered at the end of the project.

  

If the shop's tax rate is 32 percent and its discount rate is 10 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

HINT: Calculate the depreciation for each year and use it to get the after tax-salvage value. Next, calculate OCF using the annual depreciation and then construct CFFA for each year. Now discount all cash flows to get the NPV.

  
rev: 09_18_2012

$25,370.56

$28,496.54

$-109,782.88

$26,639.09

$24,102.03

Answer 1

Answer A. $25,370.56
Calculation Of Depreciation per Month:
Year	Depreciation
1	$1,142,400 X 0.2000 =	228,480.00
2	$1,142,400 X 0.3200 =	365,568.00
3	$1,142,400 X 0.1920 =	219,340.80
4	$1,142,400 X 0.1152 =	131,604.48
Book Value at the end of Year 4 = $1,142,400 - ($228,480 + $365,568 + $219,340.80 + $131,604.48)
Book Value at the end of Year 4 = $197,406.72
The Press Machine is sold at loss to book Value. So there will be cash refund.
Net Cash Inlow from Salvage = $166,600 + 32% X ($197,406.72 - $166,600)
Net Cash Inlow from Salvage = $176,458.15 (Approx.)
So, net Cash Inflow (Savings) from Press Machine:
Year	Savings from Cost	Net Amount After Tax Savings
	A	B = A (1 - 32%) + 32% X Dep.
1	380,800.00	332,057.60
2	380,800.00	375,925.76
3	380,800.00	329,133.06
4	380,800.00	301,057.43
Total		1,338,173.85

Calculation of NPV of Project
Particulars	Year	10% Factor	Amount	Present value
		C	D	C X D
Cash Inflow
Net Cash Inflow - Cost savings	1	0.90909	332,057.60	301,870.55
Net Cash Inflow - Cost savings	2	0.82645	375,925.76	310,682.45
Net Cash Inflow - Cost savings	3	0.75131	329,133.06	247,282.54
Net Cash Inflow - Cost savings	4	0.68301	301,057.43	205,626.28
Salvage Value of Machine	4	0.68301	176,458.15	120,523.29
Working Capital Inventory	4	0.68301	69,020.00	47,141.59
A. Total Cash Inflow - PV				1,233,126.69
Cash Outflow
Cost of Press Machine	0	1.00000	1,142,400.00	1,142,400.00
Working Capital Inventory	0	1.00000	47,600.00	47,600.00
Working Capital Inventory	1	0.90909	7,140.00	6,490.91
Working Capital Inventory	2	0.82645	7,140.00	5,900.83
Working Capital Inventory	3	0.75131	7,140.00	5,364.39
B. Total Cash Outflow - PV				1,207,756.12
NPV (A - B)				25,370.56