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

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Masters Machine Shop is considering a four-year project toimprove its production efficiency. Buying a new machine press for$385,000 is estimated to result in $145,000 in annual pretax costsavings. The press falls in the MACRS five-year class, and it willhave a salvage value at the end of the project of $45,000. Thepress also requires an initial investment in spare parts inventoryof $20,000, along with an additional $3,100 in inventory for eachsucceeding year of the project. The shop’s tax rate is 22 percentand its discount rate is 9 percent. Refer to Table 10.7. Calculatethe NPV of this project.

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4.3 Ratings (848 Votes)

Time line		0	1	2	3	4



Cost of new machine		-385000
Initial working capital		-20000
=Initial Investment outlay		-405000

5 years MACR rate			20.00%	32.00%	19.20%	11.52%	17.28%

Savings			145000	145000	145000	145000


-Depreciation	=Cost of machine*MACR%		-77000	-123200	-73920	-44352	66528	=Salvage Value
-working capital to be maintained			-3100	-3100	-3100	-3100
=Pretax cash flows			64900	18700	67980	97548
-taxes	=(Pretax cash flows)*(1-tax)		50622	14586	53024.4	76087.44
+Depreciation			77000	123200	73920	44352
=after tax operating cash flow			127622	137786	126944.4	120439.44

reversal of working capital						32400

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					35100
+Tax shield on salvage book value	=Salvage value * tax rate					14636.16
=Terminal year after tax cash flows						82136.16

Total Cash flow for the period		-405000	127622.00	137786.0000	126944.40	202575.6
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.4115816
Discounted CF=	Cashflow/discount factor	-405000	117084.4037	115971.7196	98024.36857	143509.66
NPV=	Sum of discounted CF=	69590.15

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Transcribed Image Text

Masters Machine Shop is considering a four-year project toimprove its production efficiency. Buying a new machine press for$385,000 is estimated to result in $145,000 in annual pretax costsavings. The press falls in the MACRS five-year class, and it willhave a salvage value at the end of the project of $45,000. Thepress also requires an initial investment in spare parts inventoryof $20,000, along with an additional $3,100 in inventory for eachsucceeding year of the project. The shop’s tax rate is 22 percentand its discount rate is 9 percent. Refer to Table 10.7. Calculatethe NPV of this project.