Geary Machine Shop is considering a four-year project to improve its production
ID: 2770127 • Letter: G
Question
Geary Machine Shop is considering a four-year project to improve its production eciency. Buying a new machine press for $902,400 is estimated to result in $300,800 in annual pretax cost savings. The press falls in the MACRS ve-year class (MACRS Table), and it will have a salvage value at the end of the project of $131,600. The press also requires an initial investment in spare parts inventory of $37,600, along with an additional $5,640 in inventory for each succeeding year of the project. Required : If the shop's tax rate is 32 percent and its discount rate is 18 percent, what is the NPV for this project? Show calculator work.
Explanation / Answer
Particulars
-
1
2
3
4
5
6
Total
Pre cost saving
3,00,800.00
3,00,800.00
3,00,800.00
3,00,800.00
-
-
(-)Depre on Plant
1,80,480.00
2,88,768.00
1,73,260.80
1,03,956.48
1,03,956.48
51,978.24
902,400 *0.2
902,400 *0.32
902,400* 0.192
902,400 *11.52
902,400 *11.52
902,400 *5.76
Earning before tax
1,20,320.00
12,032.00
1,27,539.20
1,96,843.52
-1,03,956.48
-51,978.24
(-)Tax @32%
38,502.40
3,850.24
40,812.54
62,989.93
-33,266.07
-16,633.04
EAT
81,817.60
8,181.76
86,726.66
1,33,853.59
-70,690.41
-35,345.20
(+)Depre on Plant
1,80,480.00
2,88,768.00
1,73,260.80
1,03,956.48
1,03,956.48
51,978.24
Free cash flow
2,62,297.60
2,96,949.76
2,59,987.46
2,37,810.07
33,266.07
16,633.04
(-)Working capital
-37,600.00
-5,640.00
-5,640.00
-5,640.00
-5,640.00
-
(+)Working capital
60,160.00
-
(+) Salvage value
89,488.00
-
131,600*(1-0.32)
(-)Initial Investment
-9,02,400.00
Total cash flow
-9,40,000.00
2,56,657.60
2,91,309.76
2,54,347.46
2,32,170.07
33,266.07
16,633.04
PVF @18%
1.00
0.85
0.72
0.61
0.52
0.44
0.37
Net Present value
-9,40,000.00
2,17,506.44
2,09,214.13
1,54,803.71
1,19,750.74
14,540.91
6,161.40
-2,18,022.66
NPV of the project = -218022.66
Particulars
-
1
2
3
4
5
6
Total
Pre cost saving
3,00,800.00
3,00,800.00
3,00,800.00
3,00,800.00
-
-
(-)Depre on Plant
1,80,480.00
2,88,768.00
1,73,260.80
1,03,956.48
1,03,956.48
51,978.24
902,400 *0.2
902,400 *0.32
902,400* 0.192
902,400 *11.52
902,400 *11.52
902,400 *5.76
Earning before tax
1,20,320.00
12,032.00
1,27,539.20
1,96,843.52
-1,03,956.48
-51,978.24
(-)Tax @32%
38,502.40
3,850.24
40,812.54
62,989.93
-33,266.07
-16,633.04
EAT
81,817.60
8,181.76
86,726.66
1,33,853.59
-70,690.41
-35,345.20
(+)Depre on Plant
1,80,480.00
2,88,768.00
1,73,260.80
1,03,956.48
1,03,956.48
51,978.24
Free cash flow
2,62,297.60
2,96,949.76
2,59,987.46
2,37,810.07
33,266.07
16,633.04
(-)Working capital
-37,600.00
-5,640.00
-5,640.00
-5,640.00
-5,640.00
-
(+)Working capital
60,160.00
-
(+) Salvage value
89,488.00
-
131,600*(1-0.32)
(-)Initial Investment
-9,02,400.00
Total cash flow
-9,40,000.00
2,56,657.60
2,91,309.76
2,54,347.46
2,32,170.07
33,266.07
16,633.04
PVF @18%
1.00
0.85
0.72
0.61
0.52
0.44
0.37
Net Present value
-9,40,000.00
2,17,506.44
2,09,214.13
1,54,803.71
1,19,750.74
14,540.91
6,161.40
-2,18,022.66
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