Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $624,000 is estimated to result in $208,000 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 $91,000. The press also requires an initial investment in spare parts inventory of $26,000, along with an additional $3,900 in inventory for each succeeding year of the project.

If the shop's tax rate is 35 percent and its discount rate is 13 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

Answer 1

After tax Salvage:
Sale value			91000
Book value (624000*17.28%)			107827
Loss on salle			16827
Tax shield on loss @ 35%			5889
After tax Salvage (91000+5889)			96889
Annual Operating cashflows:
			Year -1	Year-2	Year-3	Year-4
Pree tax saving			208000	208000	208000	208000
Lless: Depreciation			124800	199680	119808	71885
Before tax Income			83200	8320	88192	136115
Less: tax @ 35%			29120	2912	30867.2	47640.25
After tax Income			54080	5408	57324.8	88474.75
Add: Depreciation			124800	199680	119808	71885
Annual Operating cashflows			178880	205088	177132.8	160359.8
NPV:
			Year-0	Year-1	Year-2	Year-3	Year-4
Initial Investment			-624000
WC investment			-26000	-3900	-3900	-3900
Annual cash operating flows				178880	205088	177132.8	160359.8
After tax salvage							96889
WC release							37700
Net cashflows			-650000	174980	201188	173232.8	294948.8
PVF at 13%			1	0.8849558	0.783147	0.69305	0.613319
Present value of CF			-650000	154849.56	157559.7	120059	180897.6
NPV			-36634