A little unsure of how to go at this. Warmack Machine Shop is considering a four

Question

A little unsure of how to go at this.

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.)

Explanation / Answer

NPV of this project = Year 0 cash Flow + Year 1 cash Flow/(1+r) + Year 2 cash Flow/(1+r)^2 + Year 3 cash Flow/(1+r)^3 + Year 4 cash Flow/(1+r)^4

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

Working Year 0 Year1 Year2 Year3 Year4 Annual pretax cost savings [a] 240000 240000 240000 240000 Tax rate [b] 30% 30% 30% 30% Annual posttax cost savings [c = a*(1-b)] 168000 168000 168000 168000 Working Capital [d] -30000 -3500 -3500 -3500 40500 Depreciation Rate (MACRS 5 Year) [e] 20.00% 32.00% 19.20% 11.52% Initial Investment [f] -570000 Annual Depreciation [g= d*570000]                  114,000       182,400                      109,440            65,664 Depreciation Tax Shield [h =g*b]                    34,200          54,720                        32,832            19,699 Accumulated depreciation at the end of project [i= sum of h]]          471,504 Book Value at the end of project [j = 570000-i]            98,496 Salvage Value [k]            96,000 Tax on Loss of Salvage Value [l = (k-j)*b]                -749 Post tax salvage Value [m = k-l]]            96,749 Annual Cash Flow [n = c +d+f+h+m] -600000 198700 219220 197332 324948

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