Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,075,200 is estimated to result in $358,400 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 $156,800. The press also requires an initial investment in spare parts inventory of $44,800, along with an additional $6,720 in inventory for each succeeding year of the project. If the shop's tax rate is 34 percent and its discount rate is 15 percent, what is the NPV for this project?

Possible Answers:

$-105,325.85

$-101,509.12

$-212,139.73

$-110,592.14

$-100,059.55

Answer 1

	0	1	2	3	4
Machine cost	-1,075,200					A
MACRS		20.00%	32.00%	19.20%	11.52%
Depreciation		215,040.00	344,064.00	206,438.40	123,863.04
Tax saving on depreciation @ 34%		73,113.60	116,981.76	70,189.06	42,113.43	B
Book Value (11.52% + 5.76%)					185,794.56
Salvage Value					156,800.00
After-tax SV = SV - (SV - BV)*Tax					166,658.15	D
Net change in WC	-44,800.00	-6,720.00	-6,720.00	-6,720.00	64,960.00	E
After-tax cost saving 358400*(1-0.34)		236,544.00	236,544.00	236,544.00	236,544.00	F
FCF	-1,120,000.00	302,937.60	346,805.76	300,013.06	510,275.58	Sum of A to F
NPV @ 15%	-105,325.85