Geary Machine Shop is considering a four-year project to improve its production
ID: 2651140 • Letter: G
Question
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $681,600 is estimated to result in $227,200 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 $99,400. The press also requires an initial investment in spare parts inventory of $28,400, along with an additional $4,260 in inventory for each succeeding year of the project. All investment in Net Working Capital is recovered at the end of the project's life.
If the shop's tax rate is 32 percent and its discount rate is 18 percent, what is the NPV for this project? (Do not round your intermediate calculations.).HINT: Calculate the depreciation for each year and use to get the after-tax salvage value of the assets. Calculate OCF using the depreciation for each year and use it to construct the CFFA. Now discount all the cash flows based on when they take place to get the NPV.
Required :If the shop's tax rate is 32 percent and its discount rate is 18 percent, what is the NPV for this project? (Do not round your intermediate calculations.).HINT: Calculate the depreciation for each year and use to get the after-tax salvage value of the assets. Calculate OCF using the depreciation for each year and use it to construct the CFFA. Now discount all the cash flows based on when they take place to get the NPV.
Explanation / Answer
Answer
NPV = - $ 102,572.94
Working
Post Tax Salvage Value = Salvage Value - Tax rate*(Salvage Value - Book Value)
Post Tax Salvage Value = 99400 - 32%*(99400-(681600*(11.52%+5.76%))
Post Tax Salvage Value = 105281.75
Year 0 Year 1 Year 2 Year 3 Year 4 NPV Initial Investment - Machine -681600 MACRS Depreciation Rate 20% 32% 19.20% 11.52% Depreciation 136,320.00 218,112.00 130,867.20 78,520.32 Annual Pretax Cost Saving 227,200.00 227,200.00 227,200.00 227,200.00 Tax Expenses 29,081.60 2,908.16 30,826.50 47,577.50 Post Tax Salvage Value 105,281.75 Working Capital -28400 -4260 -4260 -4260 41180 Cash Flow -710000 193,858.40 220031.84 192113.504 326084.256 PV Factor @ 18% 1.000000 0.847458 0.718184 0.608631 0.515789 PV of Cash Flow (710,000.00) 164,286.78 158,023.44 116,926.21 168,190.63 (102,572.94)Related Questions
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