Geary Machine Shop is considering a four-year project to improve its production
ID: 2616438 • Letter: G
Question
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $739,200 is estimated to result in $246,400 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 $107,800. The press also requires an initial investment in spare parts inventory of $30,800, along with an additional $4,620 in inventory for each succeeding year of the project.
If the shop's tax rate is 32 percent and its discount rate is 10 percent, what is the NPV for this project? (Do not round your intermediate calculations.)
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $739,200 is estimated to result in $246,400 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 $107,800. The press also requires an initial investment in spare parts inventory of $30,800, along with an additional $4,620 in inventory for each succeeding year of the project.
TABLE 1 MACRS Half-Year Convention Depreciation Rate for Recovery Period 3-year 5-year 7-year 10-year 15-year 20-year 33.33 44.45 14.81 7.41 20.00 32.00 19.20 11.52 11.52 5.78 14.29 24.49 17.49 12.49 8.93 8.92 10.00 18.00 14.40 11.52 9.22 7.37 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 00 6.55 6.55 + STOG?NOVOGOWN- 5.91 3.750 7.219 6.677 6.177 5.713 5.285 4.888 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231 5.90 5.91 5.90 5.91 2.95Explanation / Answer
Calculation of NPV of the project Year 0 1 2 3 4 NPV Purchase of new machine press -$739,200.00 Pretax cost savings $246,400.00 $246,400.00 $246,400.00 $246,400.00 Tax on cost savings @ 32% -$78,848.00 -$78,848.00 -$78,848.00 -$78,848.00 Depreciation tax shield $47,308.80 $75,694.08 $45,416.45 $27,249.87 After tax salvage value $114,178.80 Initial investment in spare parts -$30,800.00 -$4,620.00 -$4,620.00 -$4,620.00 Net Cash flow -$770,000.00 $210,240.80 $238,626.08 $208,348.45 $308,980.67 x Discount factor @ 10% 1 0.909090909 0.826446281 0.751314801 0.683013455 Present Values -$770,000.00 $191,128.00 $197,211.64 $156,535.27 $211,037.96 -$14,087.13 NPV of the project = -$14,087.13 Working Calculation of depreciation using MACRS five year class and depreciation tax shield Year Cost of machine Depreciation rate Depreciation Depreciation tax shield @32% 1 $739,200.00 20% $147,840.00 $47,308.80 2 $739,200.00 32% $236,544.00 $75,694.08 3 $739,200.00 19.20% $141,926.40 $45,416.45 4 $739,200.00 11.52% $85,155.84 $27,249.87 Accumulated Depreciation $611,466.24 Calculation of after tax salvage value of machine Salvage value of machine $107,800.00 Less : Book value of machine at the end of 4th year $127,733.76 [$739200 - $611466.24] Loss on sale -$19,933.76 Tax shield on Loss @ 32% $6,378.80 After tax salvage value $114,178.80
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