Purple Haze Machine Shop is considering a four-year project to improve its produ
ID: 2760766 • Letter: P
Question
Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $510752 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 $87902. The OCFs of the project during the 4 years are $170613, $196520, $174470 and $164265, respectively. The press also requires an initial investment in spare parts inventory of $20172, along with an additional $1941 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
Calculate the NPV for the project:
Year
Cash flows
Discounting
Factor @ 6%
Discounted
cash flows
0
$ (530,924)
0.9434
$ (500,873.70)
1
$ 168,222
0.88999
$ 149,715.90
2
$ 193,579
0.83962
$ 162,532.80
3
$ 172,529
0.79209
$ 136,658.50
4
$ 250,226
0.747258
$ 186,983.38
NPV
$ 135,017
Therefore, NPV is $135,017.
Year
Cash flows
Discounting
Factor @ 6%
Discounted
cash flows
0
$ (530,924)
0.9434
$ (500,873.70)
1
$ 168,222
0.88999
$ 149,715.90
2
$ 193,579
0.83962
$ 162,532.80
3
$ 172,529
0.79209
$ 136,658.50
4
$ 250,226
0.747258
$ 186,983.38
NPV
$ 135,017
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