Question

8.

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Problem 10-21 Cost-Cutting Proposals (LO2] Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $480,000 is estimated to result in $202,000 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 $73,000. The press also requires an initial investment in spare parts inventory of $39,000, along with an additional $4,050 in inventory for each succeeding year of the project. The shop's tax rate is 24 percent and its discount rate is 9 percent. (MACRS schedule) 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? Yes No

Below is MACRS Schedule

Answer 1

solution: annual pretax cost saving 202,000.00 202,000.00 202,000.00 202,000.00 Less; Depreciation* - 96,000.00 - 153,600.00 - 92,160.00 - 55,296.00 Income before tax 106,000.00 48,400.00 109,840.00 146,704.00 Less : tax at 24% - 25,440.00 - 11,616.00 - 26,361.60 - 35,208.96 Net income 80,560.00 36,784.00 83,478.40 | 111,495.04 | Add : Depreciation 96,000.00 153,600.00 92,160.00 55,296.00 OCF 176,560.00 | 190,384.00 175,638.40 | 166,791.04 After tax sale value ** 75,386.56 cost of machine - 480,000.00 Change in net working capital - 39,000.00 - _4,050.00 - 4,050.00 - 4,050.00 51,150.00 net cash flow - 519,000.00 | 172,510.00 186,334.00 | 171,588.40 293,327.60 x discount rate at 9% 1.00000 0.91743 0.84168 0.77218 0.70843 PV -519,000.00 158,266.06 | 156,833.60 | 132,497.73 207,800.67 136,398.05 Machine should be bought as it has positive NPV. NPV *Marcs depreciation Depreciation rate x cost Depreciation 0.20 480,000.00 | 96,000.00 0.32 480,000.00 153,600.00 0.192 480,000.00 92,160.00 4 Total 0.1152 480,000.00 55,296.00 397,056.00 **After tax sale value Cost Less : Accumulated Dep Book value sale value Loss on sale Tax shield on loss = 9944*24% After tax sale value 480,000.00 397,056.00 82,944.00 73,000.00 9,944.00 2,386.56 75,386.56