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

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Finance

Masters Machine Shop is considering a four-year project toimprove its production efficiency. Buying a new machine press for$385,000 is estimated to result in $145,000 in annual pretax costsavings. The press falls in the MACRS five-year class, and it willhave a salvage value at the end of the project of $45,000. Thepress also requires an initial investment in spare parts inventoryof $20,000, along with an additional $3,100 in inventory for eachsucceeding year of the project. The shop’s tax rate is 22 percentand its discount rate is 9 percent. Refer to Table 10.7. Calculatethe NPV of this project.

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4.3 Ratings (848 Votes)

Time line 0 1 2 3 4
Cost of new machine -385000
Initial working capital -20000
=Initial Investment outlay -405000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 17.28%
Savings 145000 145000 145000 145000
-Depreciation =Cost of machine*MACR% -77000 -123200 -73920 -44352 66528 =Salvage Value
-working capital to be maintained -3100 -3100 -3100 -3100
=Pretax cash flows 64900 18700 67980 97548
-taxes =(Pretax cash flows)*(1-tax) 50622 14586 53024.4 76087.44
+Depreciation 77000 123200 73920 44352
=after tax operating cash flow 127622 137786 126944.4 120439.44
reversal of working capital 32400
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 35100
+Tax shield on salvage book value =Salvage value * tax rate 14636.16
=Terminal year after tax cash flows 82136.16
Total Cash flow for the period -405000 127622.00 137786.0000 126944.40 202575.6
Discount factor= (1+discount rate)^corresponding period 1 1.09 1.1881 1.295029 1.4115816
Discounted CF= Cashflow/discount factor -405000 117084.4037 115971.7196 98024.36857 143509.66
NPV= Sum of discounted CF= 69590.15

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Transcribed Image Text

Masters Machine Shop is considering a four-year project toimprove its production efficiency. Buying a new machine press for$385,000 is estimated to result in $145,000 in annual pretax costsavings. The press falls in the MACRS five-year class, and it willhave a salvage value at the end of the project of $45,000. Thepress also requires an initial investment in spare parts inventoryof $20,000, along with an additional $3,100 in inventory for eachsucceeding year of the project. The shop’s tax rate is 22 percentand its discount rate is 9 percent. Refer to Table 10.7. Calculatethe NPV of this project.

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