Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,104,000 is estimated to result in $368,000 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 $161,000. The press also requires an initial investment in spare parts inventory of $46,000, along with an additional $6,900 in inventory for each succeeding year of the project.

  

Required :

If the shop's tax rate is 32 percent and its discount rate is 11 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

  
Options:

$-2,423.87

$802.03

$-128,390.88

$-2,545.07

$-2,302.68

Please show work or excel formulas/calculations.

Answer 1

Option 1 is right

OCF		MACRS 5 year
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1	368000	-220800	147200	-47104	100096	320896
2	368000	-353280	14720	-4710.4	10009.6	363289.60
3	368000	-211968	156032	-49930	106101.76	318069.76
4	368000	-127180.8	240819.2	-77062	163757.056	290937.86

Salvage
Purchase price	1104000
Less: Depreciation	-913228.8
Closing book value	190771.2
Selling price	161000
Gain/(loss)	-29771.2
Tax/ Saving	9526.784
Net salvage	170526.784

Net Cash flows are as below

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-1104000		-46000		-1150000
1		$320,896.00	-6900		313996
2		$363,289.60	-6900		356389.6
3		$318,069.76	-6900		311169.76
4		$290,937.86	66700	170527	528164.64

NPV	($2,423.87)

WORKINGS

Book1- Excel X AutoSave ( Off Sign in Tell me what you want to do File Formulas Review View Help Share Home Insert Draw Page Layout Data 8 Calibri General A A Wrap Text Conditional Format as Cell Formatting BIUH Insert Delete Format Sort & Find & Paste A Merge & Center $% , Filter Select Table Styles Editing Clipboard Font Alignment Number Styles Cell: A1 INPUTS P C G K M A F INPUTS 2 Initial cost 3 Tax rate Selling price king capital Salvage Purchase price Less: Depreciation -SUM(E17:E23) Closing book value -L2 L3 1104000 ash flow loCE Year Initia 82 Working capital Salvago -B5 -6900 Net cash flows -SUM(D3:G3) -SUM(D4:G4) 0.32 -117 161000 SUMD6-G6 cooo -84 -L6-L4 Selling price Gain/(loss) Tax/Saving o11 -120 --SUMIE3:161 7 -SUM(D7:G7) I 10 8 17"B3 10 Net salvage L6IL8 12 -NPV(B6,H4:H10)+H3 NPV 13 14 15 Year 16 MACRS 5 vear Depreciation rate OCF Depreciation EBIT OCF 0.2 Year Cash flows ax PAI SD$3 B17 |-SD$ 3 B18 - $D$ 3 . B 19 SUMID18:E18 F18.SB$3-F18+618 u10 E19 18 3 368000 0.192 19 4 20 5 368000 -SUM (D19: E 19)-F19 * SB$ 3-F19G19 -SUM( D20: E20) H19- E19 =H20 E20 0.1152 F20'$B$3F20+G20 0.1152 368000 21 E 22 0.0576 23 Sheet1 Sheet2 Sheet3 + Ready + 100% P ENG 10:58 PM