Question

PRESTON PRINTING is considering a four-year project to improve its production efficiency. Buying a new press for $535,000 is estimated to result in $219,000 in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of $89,000. The MACRS rates are 0.2, 0.32, 0.192, 0.1152, 0.1152, and 0.0576 for Years 1 to 6, respectively. The press also requires an incremental $4,600 in inventory for each of the four years of the project. It must also invest $24,000 at the outset for spare parts inventory. Both types of inventory will return to zero when the project ends. The shop's tax rate is 23 percent and its discount rate is 15 percent. For PRESTON, which of the following values is closest to the project’s IRR?

• A. 0.16
• B. 0.18
• C. 0.20
• D. 0.22
• E. 0.24

Answer 1