Geary Machine Shop is considering a four-year project to improve its production
ID: 2615716 • 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. Required : If the shop's tax rate is 34 percent and its discount rate is 19 percent, what is the NPV for this project? (Do not round your intermediate calculations.) rev: 09_18_2012 $-186,358.67 $-182,070.23 $-278,687.26 $-195,676.61 $-177,040.74
Explanation / Answer
NPV : - $ 186,358.67
Computation of Annual Depreciation
Computation of NPV:
* Operating cash flows after taxes = Annual pretax cost savings x ( 1 - 0.34) + Annual depreciation x 0.34.
** Book value of the equipment after 4 years = $ 184,136.
Gain ( loss) on salvage = $ 155,400 - $ 184,136 = $ ( 28,736)
Tax effect of the loss on salvage = $ ( 28,736) x 0.34 = $ ( 9,770)
After tax salvage value = Sale proceeds + Tax refund = $ 155,400 + $ 9.770 = $ 165,170.
Year 1 2 3 4 MACRS depreciation rate 20 % 32 % 19.2 % 11.52 % Annual Depreciation $ 213,120 $ 340,992 $ 204,595 $ 122,757Related Questions
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