Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $400,000 is estimated to result in $154,000 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 $54,000. The press also requires an initial investment in spare parts inventory of $23,000, along with an additional $3,250 in inventory for each succeeding year of the project. The shop’s tax rate is 23 percent and its discount rate is 10 percent.

Answer 1

4. YEAR after tax salvage value:(plant) $154,000.00 $128,000.00 $154,000.00 $154,000.00 $154,000.00 $54,000.00 Pretax cost savings salvage value of plant $80,000.00 $74,000.00 $17,020.00 $76,800.00 $46,080.00 $69,120.00 less: depreciation book value on date of sale $77,200.00 $17,756.00 $26,000.00 $107,920.00 -$15,120.00 profit on sale ЕВТ $5,980.00 tax @23% $24,821.60 less: $56,980.00 $20,020.00 $59,444.00 $83,098.40 salvage value $54,000.00 EAT $80,000.00 $128,000.00 $76,800.00 $46,080.00 -$3,477.60 add: depreciation less: tax on gain $136,980.00 $148,020.00 $136,244.00 $129,178.40 $57,477.60 Net operating cash flow after tax salvage value initial investment: -$400,000.00 plant working capital after tax salvage value: -$23,000.00 -$3,250.00 -$3,250.00 -$3,250.00 $32,750.00 $57,477.60 plant $132,994.00 -$423,000.00 $133,730.00 $144,770.00 $219,406.00 Cash flows pv @ 10% 0.9091 1 0.8264 0.7513 0.6830 -$423,000.00 $121,572.73 $119,644.63 $99,920.36 $149,857.25 PRESENT VALUE $67,994.97 NPV