Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $480,000 is estimated to result in $202,000 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 $73,000. The press also requires an Initial investment in spare parts inventory of $39,000, along with an additional $4,050 in Inventory for each succeeding year of the project. The shop's tax rate is 24 percent and its discount rate is 9 percent. (MACRS schedule) 

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 

Should the company buy and install the machine press?

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $73,000.00 $82,944.00 -$9,944.00 $202,000.00 $96,000.00 $106,000.00 $25,440.00 $80,560.00 $96,000.00 $176,560.00 less: $202,000.00 $153,600.00 $48,400.00 $11,616.00 $36,784.00 $153,600.00 $190,384.00 4 $202,000.00 $55,296.00 $146,704.00 $35,208.96 $111,495.04 $55,296.00 $166,791.04 $202,000.00 $92,160.00 $109,840.00 $26,361.60 $83,478.40 $92,160.00 $175,638.40 add: salvage value less: tax on gain after tax salvage value $73,000.00 -$2,386.56 $75,386.56 YEAR Pretax cost savings depreciation EBT tax @24% EAT depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 9% PRESENT VALUE NPV - $480,000.00 $39,000.00 -$4,050.00 - $4,050.00 $4,050.00 $51,150.00 -$519,000.00 $172,510.00 0.9174 $158,266.06 $186,334.00 0.8417 $156,833.60 $171,588.40 0.7722 $132,497.73 $75,386.56 $293,327.60 0.7084 $207,800.67 -$519,000.00 $136,398.05 Yes, asset should be purchased