Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,017,600 is estimated to result in $339,200 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 $148,400. The press also requires an initial investment in spare parts inventory of $42,400, along with an additional $6,360 in inventory for each succeeding year of the project. If the shop's tax rate is 33 percent and its discount rate is 9 percent, what is the NPV for this project?

Answer 1

Year	Annual Pretax cost savings	Depreciation	Profits before tax	Tax rate 33%. Profit after tax is 67% i.e (100-33%)	Cash flows after tax	Investment	Working capital	Total cash flows	PV at 9%	Presnt Value
0						-1017600	42400	-1017600	1	-1017600
1	$339200	20%= 203520	135680	90905	294425		-6360	288065	.9174	264270
2	$339200	32%= 325632	13568	9090	334722		-6360	328362	.8417	276382
3	$339200	19.20%= 195379	143821	96360	291739		-6360	285379	.7722	220370
4	$339200	11.52%= 117227	221973	148721	265948	148400	61480	475828	.7084	337076
									Net Present value	80498