Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $796800 is estimated to result in $265600 in annual pretax cost savings. The press falls in the MACRS (MACRS Table) five-year class and it will have a salvage value at the end of the project of $116200. The press also requires an initial investment in spare parts inventory of $33200, along with an additional $4980 in inventory for each succeeding year of the project. If the shops tax rate is 23 percent and it’s discount rate is 13 percent, what is the NPV for this project?

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $796,800 is estimated to result in $265,600 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 $116,200. The press also requires an initial investment in spare parts inventory of $33,200, along with an additional $4,980 in inventory for each succeeding year of the project. If the shop's tax rate is 23 percent and its discount rate is 13 percent, what is the NPV for this project? Multiple Choice $-13.92176 $-11,326. 20

Answer 1

1 2 after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $116,200.00 $137,687.04 -$21,487.04 $265,600.00 $159,360.00 $106,240.00 $24,435.20 $81,804.80 $159,360.00 $241.164.80 3 $265,600.00 $152,985.60 $112,614.40 $25,901.31 $86,713.09 $152,985.60 $239,698.69 $265,600.00 $254,976.00 $10,624.00 $2,443.52 $8,180.48 $254,976.00 $263,156.48 less: 4 $265,600.00 $91,791.36 $173,808.64 $39,975.99 $133,832.65 $91,791.36 $225,624.01 add: salvage value less: tax on gain after tax salvage value $116,200.00 -$4,942.02 $121,142.02 YEAR Pre tax savings depreciation EBT tax @23% EAT depreciation annual operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 13% PRESENT VALUE NPV -$796,800.00 $33,200.00 $4,980.00 $4,980.00 $4,980.00 $48,140.00 -$830,000.00 1 -$830,000.00 -$13,921.76 $236,184.80 0.8850 $209,013.10 $258,176.48 0.7831 $202,190.05 $234,718.69 0.6931 $162,671.82 $121,142.02 $394,906.03 0.6133 $242,203.27