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Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new...

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Finance

Starset Machine Shop is considering a 4-year project to improveits production efficiency. Buying a new machine press for $390,000is estimated to result in $148,000 in annual pretax cost savings.The press qualifies for 100 percent bonus depreciation, and it willhave a salvage value at the end of the project of $48,000. Thepress also requires an initial investment in spare parts inventoryof $21,000, along with an additional $3,150 in inventory for eachsucceeding year of the project. The shop’s tax rate is 21 percentand its discount rate is 8 percent. Calculate the NPV of thisproject. (Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.)

Answer & Explanation Solved by verified expert
4.1 Ratings (616 Votes)
Calculating Initial investment in project Cost of machine 390000 Initial investment in inventory 21000 Initial investment in project in year 0 Cost of machine Initial investment in inventory 390000 21000 411000 Calculating depreciation Since the machine qualifies for 100 bonus depreciation therefore full cost of machine will charged as depreciation in year 1 depreciation in year 1 100 of cost of machine 100 x 390000 390000 Also depreciation for year 2 depreciation for year 3 depreciation for year 4 0 Calculating after tax operating cash flows Incremental revenue    See Answer
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Starset Machine Shop is considering a 4-year project to improveits production efficiency. Buying a new machine press for $390,000is estimated to result in $148,000 in annual pretax cost savings.The press qualifies for 100 percent bonus depreciation, and it willhave a salvage value at the end of the project of $48,000. Thepress also requires an initial investment in spare parts inventoryof $21,000, along with an additional $3,150 in inventory for eachsucceeding year of the project. The shop’s tax rate is 21 percentand its discount rate is 8 percent. Calculate the NPV of thisproject. (Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.)

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