In: Finance
Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $902,400 is estimated to result in $300,800 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 $131,600. The press also requires an initial investment in spare parts inventory of $37,600, along with an additional $5,640 in inventory for each succeeding year of the project. |
If the shop's tax rate is 22 percent and its discount rate is 11
percent, what is the NPV for this project? |
Time line | 0 | 1 | 2 | 3 | 4 | |||
Cost of new machine | -902400 | |||||||
Initial working capital | -37600 | |||||||
=Initial Investment outlay | -940000 | |||||||
5 years MACR rate | 20.00% | 32.00% | 19.20% | 11.52% | 17.28% | |||
Profits | 300800 | 300800 | 300800 | 300800 | ||||
-Depreciation | =Cost of machine*MACR% | -180480 | -288768 | -173260.8 | -103956.5 | 155934.72 | =Salvage Value | |
-working capital to be maintained | -5640 | -5640 | -5640 | -5640 | ||||
=Pretax cash flows | 114680 | 6392 | 121899.2 | 191203.52 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 89450.4 | 4985.76 | 95081.376 | 149138.75 | |||
+Depreciation | 180480 | 288768 | 173260.8 | 103956.48 | ||||
=after tax operating cash flow | 269930.4 | 293753.8 | 268342.18 | 253095.23 | ||||
reversal of working capital | 60160 | |||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 102648 | ||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 34305.638 | ||||||
=Terminal year after tax cash flows | 197113.64 | |||||||
Total Cash flow for the period | -940000 | 269930.4 | 293753.8 | 268342.18 | 450208.86 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.11 | 1.2321 | 1.367631 | 1.5180704 | ||
Discounted CF= | Cashflow/discount factor | -940000 | 243180.5 | 238417.1 | 196209.49 | 296566.52 | ||
NPV= | Sum of discounted CF= | 34373.69189 |