Question

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,065,600 is estimated to result in $355,200 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 $155,400. The press also requires an initial investment in spare parts inventory of $44,400, along with an additional $6,660 in inventory for each succeeding year of the project.

  

Required :

If the shop's tax rate is 34 percent and its discount rate is 19 percent, what is the NPV for this project?

Answer 1

	Year	0	1	2	3	4
	Investment	1,065,000
	Initial Inventory	44,400
add	Pretax cost savings		355200	355200	355200	355200
	Depreciation rate as per MACRS table		20%	32%	19.20%	11.52%
Minus	Depreciation = Investment* depreciation rate		213000	340800	204480	122688
	EBT		142200	14400	150720	232512
	Tax = EBT * Tax Rate		48348	4896	51244.8	79054.08
	EAT = EBT - Tax		93852.00	9504.00	99475.20	153457.92
add	depreciation		213000	340800	204480	122688
minus	inventory		6600	6600	6600	6600
add	After tax salvage value					102564	Salvage value * (1-tax rate)
	Cash Flow	1,109,400	300252.00	343704.00	297355.20	372109.92
	Discount rate	19%
	NPV	-252,360.85	Using NPV(discount rate,All Cash flows) - Investment

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