Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $720,000 is estimated to result in $240,000 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 $105,000. The press also requires an initial investment in spare parts inventory of $30,000, along with an additional $4,500 in inventory for each succeeding year of the project. Required : If the shop's tax rate is 31 percent and its discount rate is 18 percent, what is the NPV for this project? (Do not round your intermediate calculations.) rev: 09_18_2012 $-106,139.92 $-103,318.84 $-170,365.41 $-111,446.91 $-100,832.92

Answer 1

		A	B	C	D	E
	Year	0	1	2	3	4
1	Initial investment	-720000
2	Annual Pretax Cost Savings		240000	240000	240000	240000
3	MACRS Rate		20%	32%	19.2%	11.52%
4	Depreciation = Depreciation rate* Investment		144000	230400	138240	82944
5	EBIT = Annual Pretax cost - Depreciation		96000	9600	101760	157056
6	Tax = EBIT * Tax rate		29760	2976	31545.6	48687.36
7	Net income = EBIT -TAX		66240.00	6624.00	70214.40	108368.64
8	Depreciation		144000	230400	138240	82944
9	After Tax Salvage Value					72450
10	Working Capital	-30,000	-4500	-4500	-4500	-4500
11	Total Cash flow	-750,000	205740.00	232524.00	203954.40	259262.64
12	Discount rate	18%
	NPV of Cash flows	-150791.22	NPV(18%,B11:E11)+A11

The options are not matching . But I think my answer is correct.
Please dicuss before rating.

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