Warmack Machine Shop is considering a four-year project to improve its productio
ID: 2763005 • Letter: W
Question
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $540,000 is estimated to result in $225,000 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 $91,000. The press also requires an initial investment in spare parts inventory of $27,000, along with an additional $3,200 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.
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $540,000 is estimated to result in $225,000 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 $91,000. The press also requires an initial investment in spare parts inventory of $27,000, along with an additional $3,200 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
Explanation / Answer
NPV of this project is $153,566 so Warmack Machine Shop should accept this project.
$ Purschase Price 540,000 Year MACRS % Depreciation$ 1 20.00 108,000 2 32.00 172,800 3 19.20 103,680 4 11.52 62,208 446,688 Book value at he end of 4 year 93,312Related Questions
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