Geary Machine Shop is considering a four-year project to improve its production
ID: 2615118 • Letter: G
Question
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,065,600 is estimated to result in $355,200 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $155,400. The press also requires an initial investment in spare parts inventory of $44,400, along with an additional $6,660 in inventory for each succeeding year of the project.
If the shop's tax rate is 34 percent and its discount rate is 19 percent, what is the NPV for this project?
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,065,600 is estimated to result in $355,200 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $155,400. The press also requires an initial investment in spare parts inventory of $44,400, along with an additional $6,660 in inventory for each succeeding year of the project.
Explanation / Answer
Best of Luck. God Bless
Year 0 1 2 3 4 Investment 1,065,000 Initial Inventory 44,400 add Pretax cost savings 355200 355200 355200 355200 Depreciation rate as per MACRS table 20% 32% 19.20% 11.52% Minus Depreciation = Investment* depreciation rate 213000 340800 204480 122688 EBT 142200 14400 150720 232512 Tax = EBT * Tax Rate 48348 4896 51244.8 79054.08 EAT = EBT - Tax 93852.00 9504.00 99475.20 153457.92 add depreciation 213000 340800 204480 122688 minus inventory 6600 6600 6600 6600 add After tax salvage value 102564 Salvage value * (1-tax rate) Cash Flow 1,109,400 300252.00 343704.00 297355.20 372109.92 Discount rate 19% NPV -252,360.85 Using NPV(discount rate,All Cash flows) - InvestmentRelated Questions
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