Purple Haze Machine Shop is considering a four-year project to improve its produ

Question

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $470,000 is estimated to result in $190,000 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 $80,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $2,500 in inventory for each succeeding year of the project. The shop

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $470,000 is estimated to result in $190,000 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 $80,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $2,500 in inventory for each succeeding year of the project. The shop

Explanation / Answer

Cost of New Machine $470,000 Salvage value $80,000 Additional investment $20,000 Operational Cost Saving $190,000 Life 5 Discount rate 9% Marginal Tax 35% Years 0 1 2 3 4 5 Saving in Cost ($470,000) $190,000 $190,000 $190,000 $190,000 $190,000 Less: Additional inventory ($20,000) $2,500 $2,500 $2,500 $2,500 $2,500 Dep. 78000 78000 78000 78000 78000 EBIT $109,500 $109,500 $109,500 $109,500 $109,500 Tax $38,325 $38,325 $38,325 $38,325 $38,325 Net Profit $71,175 $71,175 $71,175 $71,175 $71,175 Cash Flow $149,175 $116,325 $116,325 $116,325 $116,325 Salvage value $80,000 Pv factor @ 9% 0.92 0.84 0.77 0.71 0.65 PV ($490,000) $136,857.80 $97,908.43 $89,824.24 $82,407.56 $127,597.78 NPV $44,596

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