Geary Machine Shop is considering a four-year project to improve its production
ID: 2665719 • Letter: G
Question
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $210,000 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 $80,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $3,000 in inventory for each succeeding year of the project. If the shop's tax rate is 35 percent and its discount rate is 9 percent, the NPV for the project isExplanation / Answer
9% Discount
Present Value of
Cash Flow
Rate
Cash Flows
178300
=1/(1+0.09)^1
0.917431193
163577.9817
178300
=1/(1+0.09)^2
0.841679993
150071.5428
178300
=1/(1+0.09)^3
0.77218348
137680.3145
178300
=1/(1+0.09)^4
0.708425211
126312.2151
80000
=1/(1+0.09)^4
0.708425211
56674.01689
634316.071
Estimated Additional Tax Profit After Tax Cash Flow Depreciation Inventory 35% Depreciation Cash Flow Year 1 210000 125000 3000 82000 28700 53300 125000 178300 Year 2 210000 125000 3000 82000 28700 53300 125000 178300 Year 3 210000 125000 3000 82000 28700 53300 125000 178300 Year 4 210000 125000 3000 82000 28700 53300 125000 178300 Solvage Value 80000 80000 80000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.