Warmack Machine Shop is considering a four-year project to improve its productio
ID: 2475153 • Letter: W
Question
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $500,000 is estimated to result in $205,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $84,000. The press also requires an initial investment in spare parts inventory of $23,000, along with an additional $2,800 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent and its discount rate is 9 percent. MACRS schedule
Calculate the NPV of this project.
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $500,000 is estimated to result in $205,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $84,000. The press also requires an initial investment in spare parts inventory of $23,000, along with an additional $2,800 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent and its discount rate is 9 percent. MACRS schedule
Property Class Year Three-Year 33.33% 44.45 14.81 7.41 Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 Five-Year 2 3 4 5 6 7 20.00% 32.00 19.20 11.52 11.52 5.76Explanation / Answer
Warmack Machine Shops Assuming NWC in spares is returned after project. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 MACRS Rates 20.00% 32.00% 19.20% 11.52% 11.52 5.76 Machine cost 500,000.00 Book Value after 4 years 86,400.00 Resale value 84,000.00 Capital Loss 2,400.00 Tax Benefit on Capital Loss @35% 840.00 NPV Calculation Year 0 Year 1 Year 2 Year 3 Year 4 Investment in Press= (500,000) Investment in NWC for spares (23,000) (2,800) (2,800) (2,800) (2,800) Return of NWC 34,200 Salvage 84,000 Net Pretax Cost Saving 205,000 205,000 205,000 205,000 Less Depreciation (100,000) (160,000) (96,000) (57,600) Pre Tax Saving 105,000 45,000 109,000 147,400 Tax @35% (36,750) (15,750) (38,150) (51,590) Tax benefit on Capital Loss 840 Post Tax Income 68,250 29,250 70,850 96,650 Add Back Depreciation 100,000 160,000 96,000 57,600 Net Cash Flow(including salvage +NWC) (523,000) 165,450 186,450 164,050 269,650 PV Factor @9% 1 0.917 0.842 0.772 0.708 PV of Cash flows (523,000.00) 151,788.99 156,931.23 126,676.70 191,026.86 NPV = Sum of PV of cash flows= $ 103,423.78
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