Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...

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Geary Machine Shop is considering a four-year project to improveits production efficiency. Buying a new machine press for $806,400is estimated to result in $268,800 in annual pretax cost savings.The press falls in the MACRS five-year class (MACRS Table), and itwill have a salvage value at the end of the project of $117,600.The press also requires an initial investment in spare partsinventory of $33,600, along with an additional $5,040 in inventoryfor each succeeding year of the project. Required : If the shop'stax rate is 33 percent and its discount rate is 16 percent, what isthe NPV for this project? (Do not round your intermediatecalculations.) rev: 09_18_2012
a. $-92,727.18
b. $-89,758.54
c. $-169,990.58
d. $-97,363.54
e. $-88,090.82

Answer & Explanation Solved by verified expert

4.2 Ratings (911 Votes)

Year	0	1	2	3	4
Initial investment	-806400
Initial investment in spare parts inventory	-33600
Addl.inv.		-5040	-5040	-5040	-5040
After-tax cash flow on salvage					124776
Recovery of NWC					53760
1.CAPEX cash flows	-840000	-5040	-5040	-5040	173496

Opg. Cash flows:
Post-tax cost savings(268800*(1-33%)		180096	180096	180096	180096
Add: Depn. Tax shields(806400Yrly. MACRS rateTax%)		53222	85156	51094	30656
2.Total annual Opg. Cash flow		233318	265252	231190	210752

3.Total annual cash flows(1+2)	-840000	228278	260212	226150	384248
PV F at 16%(1/1.16^n)	1	0.86207	0.74316	0.64066	0.55229
PV at 16%	-840000	196792	193380	144884	212217
NPV	-92727.27


Workings:
Carrying value at end of 4 yrs.(806400*(11.52%+5.76%))	139346		5-year MACRS rates
Salvage	117600		20
Loss on salvage(139346-117600)	21746		32
Tax saved on loss(21746*33%)	7176		19.2
After-tax cash flow on salvage(117600+7176)23480)	124776		11.52

			11.52
			5.76
			100


ANSWER: NPV of this project=
a. $-92,727.18

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Geary Machine Shop is considering a four-year project to improveits production efficiency. Buying a new machine press for $806,400is estimated to result in $268,800 in annual pretax cost savings.The press falls in the MACRS five-year class (MACRS Table), and itwill have a salvage value at the end of the project of $117,600.The press also requires an initial investment in spare partsinventory of $33,600, along with an additional $5,040 in inventoryfor each succeeding year of the project. Required : If the shop'stax rate is 33 percent and its discount rate is 16 percent, what isthe NPV for this project? (Do not round your intermediatecalculations.) rev: 09_18_2012a. $-92,727.18b. $-89,758.54c. $-169,990.58d. $-97,363.54e. $-88,090.82