Warmack Machine Shop is considering a four-year project to improve its productio
ID: 2710502 • Letter: W
Question
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $570,000 is estimated to result in $240,000 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 $96,000. The press also requires an initial investment in spare parts inventory of $30,000, along with an additional $3,500 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. MACRS schedule Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ Should the company buy and install the machine press?
Explanation / Answer
NPV of this project = -600000 + 198700/1.08 + 219220/1.08^2 + 197332/1.08^3 + 324948/1.08^4
NPV of this project = $ 167,422.28
The company should buy and install the machine press since NPV of this project is positive, project is viable
Year0 Year1 Year2 Year3 Year4 Machine Cost -570000 Annual pretax cost savings 240000 240000 240000 240000 Salvage Value 96000 Working Capital -30000 -3500 -3500 -3500 40500 Macrs Depreciation Rate 20% 32% 19.20% 11.52% Depreciation Expenses 114000 182400 109440 65664 Accumulated Depreciation 471504 Tax Expenses 37800 17280 39168 51552 Annual Cash Flow -600000 198700 219220 197332 324948Related Questions
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