Purple Haze Machine Shop is considering a four-year project to improve its produ
ID: 2775235 • Letter: P
Question
Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $400,000 is estimated to result in $155,000 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 $68,000. The press also requires an initial investment in spare parts inventory of $13,000, along with an additional $1,800 in inventory for each succeeding year of the project. The shop’s tax rate is 34 percent and its discount rate is 10 percent. Refer to Table 10.7.
Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $400,000 is estimated to result in $155,000 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 $68,000. The press also requires an initial investment in spare parts inventory of $13,000, along with an additional $1,800 in inventory for each succeeding year of the project. The shop’s tax rate is 34 percent and its discount rate is 10 percent. Refer to Table 10.7.
Explanation / Answer
Answer: calculation of the NPV:
Book Value at end of year 4
Particulars Dep rate Amount ($) Purchase Price 400000 Depreciation Year 1 20% 80000 Depreciation Year 2 32% 128000 Depreciation Year 3 19.20% 76800 Depreciation Year 4 11.52% 46080Book Value at end of year 4
69120 Gross Salvage value 68000 Less: Book value 69120 Recapture of Depreciation -1120 taxes 34% -380.8 Gross Salvage value 68000 Less: Taxes -380.8 Net Salvage value 68380.8Related Questions
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