Question

Boyertown Industrial Tools is considering a three-year project to improve its production efficiency. Buying a new machine press for $578,000 is estimated to result in $184,000 in annual pretax cost savings. The press falls in the MACRS five-year class, which has percentage rates starting with Year 1, of 20, 32, 19.20. 11.52, 11.52, and 5.76. The salvage value at the end of the project of $162,000. The press also requires an initial investment in spare parts inventory of $19,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will all be recovered when the project ends. If the tax rate is 35 percent and the discount rate is 12 percent, should the company buy and install the machine press? Why or why not? Multiple Choice No; the NPV is -$52,918.78 No; the NPV is - $22,311.09 Yes; the NPV is $45,602.57

Answer 1

after tax salvage value:(plant) YEAR 2 $184,000.00 Pretax cost savings $184,000.00 $184,960.00 $184,000.00 $162,000.00 salvage value of plant $115,600.00 $110,976.00 $166,464.00 less: depreciation book value on date of sale $68,400.00 $23,940.00 -$960.00 $73,024.00 profit on sale -$4,464.00 ЕВТ -$336.00 $25,558.40 less: tax @35% salvage value less: tax on gain $44,460.00 -$624.00 $47,465.60 $162,000.00 EAT $115,600.00 $184,960.00 $110,976.00 -$1,562.40 add: depreciation $158,441.60 $163,562.40 $160,060.00 $184,336.00 after tax salvage value Net operating cash flow initial investment: -$578,000.00 plant working capital -$1,500.00 $22,000.00 -$19,000.00 -$1,500.00 after tax salvage value: $163,562.40 plant Cash flows -$597,000.00 $158,560.00 $182,836.00 $344,004.00 0.7118 pv @ 12% 1 0.8929 0.7972 -$597,000.00 $141,571.43 $145,755.74 $244,855.25 PRESENT VALUE -$64,817.58 NPV No; the NPV is -$64817.58