Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $556,800 is estimated to result in $185,600 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $81,200. The press also requires an initial investment in spare parts inventory of $23,200, along with an additional $3,480 in inventory for each succeeding year of the project. If the shop's tax rate is 25 percent and its discount rate is 16 percent, what is the NPV for this project?

Answer 1

INPUTS
Initial cost	556800
Tax rate	25%
Selling price	81200
Working capital	23200
MARR	16%

Compute the OCF

OCF		MACRS 5 year
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1	185600	-111360	74240	-18560	55680	167040
2	185600	-178176	7424	-1856	5568	183744
3	185600	-106905.6	78694.4	-19674	59020.8	165926.4
4	185600	-64143.36	121456.64	-30364	91092.48	155235.84

Compute the Salvage

Purchase price	556800
Less: Depreciation	-460585
Closing book value	96215
Selling price	81200
Gain/(loss)	-15015
Tax/ Saving	3753.8
Net salvage	84954

CAsh flows are as follows

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-556800		-23200		-580000
1		$167,040.00	-3480		163560
2		$183,744.00	-3480		180264
3		$165,926.40	-3480		162446.4
4		$155,235.84	33640	84954	273829.6

Hence NPV is - $49,728.30

WORKINGS