Question

10 Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $390,000 is estimated to result in $148,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $48,000. The press also requires an initial investment in spare parts inventory of $21,000, along with an additional $3,150 in inventory for each succeeding year of the project. The shop's tax rate is 21 percent and its discount rate is 8 percent. (MACRS schedule) points Print Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV = Should the company buy and install the machine press? Ο Νο Yes

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $48,000.00 $67,392.00 $19,392.00 1 $148,000.00 $78,000.00 $70,000.00 $14,700.00 $55,300.00 $78,000.00 $133,300.00 2 $148,000.00 $124,800.00 $23,200.00 $4,872.00 $18,328.00 $124,800.00 $143,128.00 4 $148,000.00 $44,928.00 $103,072.00 $21,645.12 $81,426.88 $44,928.00 $126,354.88 $148,000.00 $74,880.00 $73,120.00 $15,355.20 $57,764.80 $74,880.00 $132,644.80 less: add: salvage value less: tax on gain after tax salvage value $48,000.00 -$4,072.32 $52,072.32 YEAR Pretax cost savings depreciation EBT tax @21% EAT depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 8% PRESENT VALUE NPV -$390,000.00 $21,000.00 $3,150.00 $3,150.00 $3,150.00 $30,450.00 -$411,000.00 $130,150.00 0.9259 $120,509.26 $139,978.00 0.8573 $120,008.57 $129,494.80 0.7938 $102,797.15 $52,072.32 $208,877.20 0.7350 $153,530.98 $411,000.00 $85,845.96 Yes, asset should be purchased