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$902,400 is estimated to result in $300,800 in annual pretax costsavings. The press falls in the MACRS five-year class (MACRSTable), and it will have a salvage value at the end of the projectof $131,600. The press also requires an initial investment in spareparts inventory of $37,600, along with an additional $5,640 ininventory for each succeeding year of the project.

If the shop's tax rate is 22 percent and its discount rate is 11percent, what is the NPV for this project?

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4.0 Ratings (809 Votes)

Time line		0	1	2	3	4



Cost of new machine		-902400
Initial working capital		-37600
=Initial Investment outlay		-940000

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

Profits			300800	300800	300800	300800


-Depreciation	=Cost of machine*MACR%		-180480	-288768	-173260.8	-103956.5	155934.72	=Salvage Value
-working capital to be maintained			-5640	-5640	-5640	-5640
=Pretax cash flows			114680	6392	121899.2	191203.52
-taxes	=(Pretax cash flows)*(1-tax)		89450.4	4985.76	95081.376	149138.75
+Depreciation			180480	288768	173260.8	103956.48
=after tax operating cash flow			269930.4	293753.8	268342.18	253095.23

reversal of working capital						60160

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					102648
+Tax shield on salvage book value	=Salvage value * tax rate					34305.638
=Terminal year after tax cash flows						197113.64

Total Cash flow for the period		-940000	269930.4	293753.8	268342.18	450208.86
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704
Discounted CF=	Cashflow/discount factor	-940000	243180.5	238417.1	196209.49	296566.52
NPV=	Sum of discounted CF=	34373.69189

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Masters Machine Shop is considering a four-year project toimprove its production efficiency. Buying a new machine press for$902,400 is estimated to result in $300,800 in annual pretax costsavings. The press falls in the MACRS five-year class (MACRSTable), and it will have a salvage value at the end of the projectof $131,600. The press also requires an initial investment in spareparts inventory of $37,600, along with an additional $5,640 ininventory for each succeeding year of the project. If the shop's tax rate is 22 percent and its discount rate is 11percent, what is the NPV for this project?