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 $490847 is estimated to result in some amount of annual pretax cost savings. The press will have an aftertax salvage value at the end of the project of $86695. The OCFs of the project during the 4 years are $175493, $191453, $170805 and $167265, respectively. The press also requires an initial investment in spare parts inventory of $25940, along with an additional $3284 in inventory for each succeeding year of the project. The shop's discount rate is 6 percent. What is the NPV for this project?

Explanation / Answer

Time line 0 1 2 3 4 Cost of equipment -533711 Installation cost 0 Total investment in new machine -533711 Net working capital -20298 =Initial Investment outlay -554009 addntl working cap -1550 -1550 -1550 -1550 OCF 173478 194157 176302 166789 Reversal of Net working capital 26498 Salvage value 87895 Terminal year non operating cash flows 114393 Total Cash flow for the period -554009 171928 192607 174752 279632 Discount factor =(1+discount rate)^n 1 1.08 1.1664 1.259712 1.36048896 Discount rate = 8.000% Discounted cash flows -554009 159192.5926 165129.4582 138723.7718 205537.8678 NPV= Sum of discounted cash flows 114574.6903

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