Question

Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $415,000 is estimated to result in $163,000 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 $63,000. The press also requires an initial investment in spare parts inventory of $26,000, along with an additional $3,400 in inventory for each succeeding year of the project. The shop's tax rate is 21 percent and its discount rate is 8 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? 

Answer 1

NPV = 111711.01

Yes (Since NPV is positive)

The operating cash flows are as below

OCF		MACRS 5 year
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1	163000	-83000	80000	-16800	63200	146200
2	163000	-132800	30200	-6342	23858	156658
3	163000	-79680	83320	-17497	65822.8	145502.8
4	163000	-47808	115192	-24190	91001.68	138809.68

Salvage
Purchase price	415000
Less: Depreciation	-343288
Closing book value	71712
Selling price	63000
Gain/(loss)	-8712
Tax/ Saving	1829.5
Net salvage	64830

Net Cash flows are

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-415000		-26000		-441000
1		$146,200.00	-3400		142800
2		$156,658.00	-3400		153258
3		$145,502.80	-3400		142102.8
4		$138,809.68	36200	64830	239839.2

WORKINGS

Book1 Excel Sign in AutoSave Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do File Home Share Calibri Wrap Text General Conditional Fornat as Cell Insert Delete Fornat Paste Formatting. Table- Styles Filter Select Alignment Styles Cells Editing Clipboard Number A1 INPUIS 2 Initial cost 415000 3 Tax rate 4 Selling price 5 Working capial 2600o 6 MARR Purchase price -8 Less: Depreciation-SUM(E17:E23) Year Initial cash flow OCF Working capital SalvageNet cash flows -SUM(D3:G3 M(D4:G4) 0.21 0B2 --BS 3400 -L2+ L3 Closing book valu SUM(D5:G5) -SUM(D6:G6 -118 0.08 119 Selli -120 M(D7:G7) Gain/lloss) Net salvage -NPV(B6, H4:H10)+H3 14 Depreciation rate OCF MACRS 5 year 0.2 Year Cash flows PAI -H17-F17 -H18-E18 0.32 1 163000 SD$3 B17 -SUM(D18:E18)-F18'SBS3-F18+G18 0.192 2 163000 0.1152 3 163000 H19-E19 20 5 0.1152 4 163000 -H20-F20 6 0.0576 23 Sheet1 Sheet2 | Sheet4 Sheet3 Sheet5 Ready ENG 10:51 PM