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Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...

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Finance

Geary Machine Shop is considering a four-year project to improveits production efficiency. Buying a new machine press for $892,800is estimated to result in $297,600 in annual pretax cost savings.The press falls in the MACRS five-year class (MACRS Table), and itwill have a salvage value at the end of the project of $130,200.The press also requires an initial investment in spare partsinventory of $37,200, along with an additional $5,580 in inventoryfor each succeeding year of the project.

  

Required :

If the shop's tax rate is 33 percent and its discount rate is 8percent, what is the NPV for this project? (Do not roundyour intermediate calculations.)

  

Answer & Explanation Solved by verified expert
3.8 Ratings (706 Votes)

NPV = 63,472.62

Formula Year (n) 0 1 2 3 4
Initial investment (II)             892,800
Savings (S)           297,600          297,600         297,600          297,600
5-year MACRS depreciation Depreciation rate ('r) 20.00% 32.00% 19.20% 11.52%
II*r Depreciation (D)           178,560          285,696         171,418          102,851
S-D EBIT           119,040             11,904         126,182          194,749
33%*EBIT Tax @ 33%               39,283                3,928             41,640              64,267
EBIT-Tax Net income (NI)               79,757                7,976             84,542          1,30,482
Add: depreciation (D)           178,560          2,85,696         1,71,418          1,02,851
NI + D Operating Cash Flow (OCF)           258,317          293,672         255,960          233,333
Recovery of NWC in year 4 Increase in NWC               (37,200)               (5,580)                       -                        -                42,780
Salvage value (sv)          130,200
II - total depreciation expense over 4 years Book value (bv)          154,276
sv - bv Gain on sale (g)            (24,076)
sv - (g*33%) After-tax salvage value (ASV)          138,145
OCF + Increase in NWC + ASV Free Cash Flow (FCF)     (930,000)     252,736.80    293,671.68 255,959.81    414,257.71
1/(1+d)^n Discount factor @ 8%                   1.000                 0.926                0.857               0.794                0.735
FCF*Discount factor PV of FCF     (930,000)     234,015.56    251,776.13 203,189.15    304,491.79
Sum of all PVs NPV           63,472.62

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Transcribed Image Text

Geary Machine Shop is considering a four-year project to improveits production efficiency. Buying a new machine press for $892,800is estimated to result in $297,600 in annual pretax cost savings.The press falls in the MACRS five-year class (MACRS Table), and itwill have a salvage value at the end of the project of $130,200.The press also requires an initial investment in spare partsinventory of $37,200, along with an additional $5,580 in inventoryfor each succeeding year of the project.  Required :If the shop's tax rate is 33 percent and its discount rate is 8percent, what is the NPV for this project? (Do not roundyour intermediate calculations.)  

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