Question

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $521645 is estimated to result in some amount of annual pretax cost savings. The press will have an aftertax salvage value at the end of the project of $86171. The OCFs of the project during the 4 years are $172648, $191855, $171074 and $168674, respectively. The press also requires an initial investment in spare parts inventory of $25569, along with an additional $2370 in inventory for each succeeding year of the project. The shop's discount rate is 7 percent. What is the NPV for this project?

Answer 1

Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 7%	Present values
0	(521,645)	(25,569)		(547,214)	1.000	(547,214)
1		(2,370)	172,648	170,278	0.935	159,138
2		(2,370)	191,855	189,485	0.873	165,504
3		(2,370)	171,074	168,704	0.816	137,713
4	86,171	32,679	168,674	287,524	0.763	219,351
				Net Present Value		134,491