Geary Machine Shop is considering a four-year project to improve its production
ID: 2823455 • Letter: G
Question
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,017,600 is estimated to result in $339,200 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $148,400. The press also requires an initial investment in spare parts inventory of $42,400, along with an additional $6,360 in inventory for each succeeding year of the project. If the shop's tax rate is 33 percent and its discount rate is 9 percent, what is the NPV for this project?
Explanation / Answer
Year
Annual Pretax cost savings
Depreciation
Profits before tax
Tax rate 33%. Profit after tax is 67% i.e (100-33%)
Cash flows after tax
Investment
Working capital
Total cash flows
PV at 9%
Presnt Value
0
-1017600
42400
-1017600
1
-1017600
1
$339200
20%= 203520
135680
90905
294425
-6360
288065
.9174
264270
2
$339200
32%= 325632
13568
9090
334722
-6360
328362
.8417
276382
3
$339200
19.20%= 195379
143821
96360
291739
-6360
285379
.7722
220370
4
$339200
11.52%= 117227
221973
148721
265948
148400
61480
475828
.7084
337076
Net Present value
80498
Year
Annual Pretax cost savings
Depreciation
Profits before tax
Tax rate 33%. Profit after tax is 67% i.e (100-33%)
Cash flows after tax
Investment
Working capital
Total cash flows
PV at 9%
Presnt Value
0
-1017600
42400
-1017600
1
-1017600
1
$339200
20%= 203520
135680
90905
294425
-6360
288065
.9174
264270
2
$339200
32%= 325632
13568
9090
334722
-6360
328362
.8417
276382
3
$339200
19.20%= 195379
143821
96360
291739
-6360
285379
.7722
220370
4
$339200
11.52%= 117227
221973
148721
265948
148400
61480
475828
.7084
337076
Net Present value
80498
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.