Please answer Question 5 or 6, whichever one you feel more comfortable answering

Question

Please answer Question 5 or 6, whichever one you feel more comfortable answering

5. Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $640,000 is estimated to result in $270,000 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 $70,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $3,500 in inventory for each succeeding year of the project. If the shop's tax rate is 35 percent and its discount rate is 14 percent, should Massey buy and install the machine press? (Assume that dNWC will be fully recovered in the last year of the project.) 6. Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. Phillips is an ongoing operation, but it expects competitive pressures to erode (decrease) its real net cash flows at 4 percent per year in perpetuity. The appropriate real discount rate for Phillips is 11 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from Phillips's operations?

Explanation / Answer

6)Present value of net cash flow from operations = Real cash flow /(Discount rate - growth )

                   = 190000/(.11-(-.04))

                   = 190000 /(.11 +.04)

                   = 190000 / .15

                   = $ 1,266,666.66   (rounded to 1,266,667)

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