Question

Starset Machine Shop is considering a 4-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 5-year MACRS 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.)

Answer 1

solution: annual pretax cost saving Less; Depreciation* Income before tax Less : tax at 24% Net income Add : Depreciation OCF After tax sale value ** cost of machine Change in net working capital net cash flow x discount rate at 9% PV NPV 1 2 3 202,000.00 202,000.00 202,000.00 202,000.00 - 96,000.00 - 153,600.00 - 92,160.00 - 55,296.00 106,000.00 48,400.00 109,840.00 146,704.00 - 25,440.00 - 11,616.00 - 26,361.60 - 35,208.96 80,560.00 36,784.00 83,478.40 111,495.04 96,000.00 153,600.00 92,160.00 55,296.00 176,560.00 | 190,384.00 175,638.40 166,791.04 75,386.56 -480,000.00 - 39,000.00 - 4,050.00 - 4,050.00 - 4,050.00 51,150.00 - 519,000.00 172,510.00 186,334.00 171,588.40 | 293,327.60 1.00000 0.91743 0.84168 0.77218 0.70843 |-519,000.00 158,266.06 156,833.60 | 132,497.73 207,800.67 | 136,398.05 *Marcs depreciation Depreciation rate x cost Depreciation 0.20 480,000.00 96,000.00 2 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