Question

1. Chapman Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $576,000 is estimated to result in $192,000 in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of $84,000. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $3,600 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop's tax rate is 35% and its discount rate is 11%. Should the firm buy and install the machine press?

Part two! the needed one....

Assume that Chapman machine shop is expected to grow at a rate of 3% after year 4. If the value of debt is $150,000, and there are 50,000 shares outstanding, what is the price per share of Chapman’s common stock?

Answer 1

Depreciation

year 1= $576,000 * 0.20 = $115,200

Year 2= $576,000 *0.32 = $184,320

Year 3= $576,000 * 0.1920 = $110,592

Year 4= $576,000 *0.1152 = $66,355.20

Book value at end of year 4= $576,000 - $115,200 - $184,320 - $110,592 - $66,355.20 = $99,532.80

After tax salvage value = $84,000 + ($99,532.80 - $84,000)(0.35) = $89,436.48

OCF₁= $192,000(1 - 0.35) + $115,200(0.35) = $165,120

OCF₂= $192,000(1 - 0.35) + $184,320(0.35) = $189,312

OCF₃= $192,000(1 - 0.35) + $110,592(0.35) = $163,507.20

OCF₄= $192,000(1 - 0.35) + $66,355.20(0.35) = $148,024.32

Year	Cash flow	PVF (11%)	PVCF
0	-576000 - 24000 = -600000	1	-600000
1	165120-3600 = 161520	0.900901	145513.5
2	189312-3600 =185712	0.811622	150728
3	163507.2-3600 = 159907.2	0.731191	116922.8
4	148024.3	0.658731	97508.2
4	89436.48	0.658731	58914.58
4	24000+3600+3600+3600 = 34800	0.658731	22923.84
Net Present value			-7489.07

The machine should not be purchased because the net present value is negative