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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$902,400 is estimated to result in $300,800 in annual pretax costsavings. The press falls in the MACRS five-year class (MACRSTable), and it will have a salvage value at the end of the projectof $131,600. The press also requires an initial investment in spareparts inventory of $37,600, along with an additional $5,640 ininventory for each succeeding year of the project.

  

If the shop's tax rate is 22 percent and its discount rate is 11percent, what is the NPV for this project?

Answer & Explanation Solved by verified expert
4.1 Ratings (646 Votes)

Time line 0 1 2 3 4
Cost of new machine -902400
Initial working capital -37600
=Initial Investment outlay -940000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 17.28%
Profits 300800 300800 300800 300800
-Depreciation =Cost of machine*MACR% -180480 -288768 -173260.8 -103956.5 155934.72 =Salvage Value
-working capital to be maintained -5640 -5640 -5640 -5640
=Pretax cash flows 114680 6392 121899.2 191203.52
-taxes =(Pretax cash flows)*(1-tax) 89450.4 4985.76 95081.376 149138.75
+Depreciation 180480 288768 173260.8 103956.48
=after tax operating cash flow 269930.4 293753.8 268342.18 253095.23
reversal of working capital 60160
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 102648
+Tax shield on salvage book value =Salvage value * tax rate 34305.638
=Terminal year after tax cash flows 197113.64
Total Cash flow for the period -940000 269930.4 293753.8 268342.18 450208.86
Discount factor= (1+discount rate)^corresponding period 1 1.11 1.2321 1.367631 1.5180704
Discounted CF= Cashflow/discount factor -940000 243180.5 238417.1 196209.49 296566.52
NPV= Sum of discounted CF= 34373.69189

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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$902,400 is estimated to result in $300,800 in annual pretax costsavings. The press falls in the MACRS five-year class (MACRSTable), and it will have a salvage value at the end of the projectof $131,600. The press also requires an initial investment in spareparts inventory of $37,600, along with an additional $5,640 ininventory for each succeeding year of the project.  If the shop's tax rate is 22 percent and its discount rate is 11percent, what is the NPV for this project?

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