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Problem 8-11 Cost-Cutting Proposals Blue Line Machine Shop is considering a four-year project to improve its...

Problem 8-11 Cost-Cutting Proposals

Blue Line Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $235,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $94,000. The press also requires an initial investment in spare parts inventory of $29,000, along with an additional $3,400 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent and the project's required return is 9 percent. Refer to Table 8.3.

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV           $

Homework Answers

Answer #1
Time line 0 1 2 3 4
Cost of new machine -560000
Initial working capital -29000
=Initial Investment outlay -589000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 17.28%
Profits 235000 235000 235000 235000
-Depreciation =Cost of machine*MACR% -112000 -179200 -107520 -64512 96768 =Salvage Value
-working capital to be maintained -3400 -3400 -3400 -3400
=Pretax cash flows 119600 52400 124080 167088
-taxes =(Pretax cash flows)*(1-tax) 77740 34060 80652 108607.2
+Depreciation 112000 179200 107520 64512
=after tax operating cash flow 189740 213260 188172 173119.2
reversal of working capital 42600
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 61100
+Tax shield on salvage book value =Salvage value * tax rate 33868.8
=Terminal year after tax cash flows 137568.8
Total Cash flow for the period -589000 189740 213260 188172 310688
Discount factor= (1+discount rate)^corresponding period 1 1.09 1.1881 1.295029 1.4115816
Discounted CF= Cashflow/discount factor -589000 174073.3945 179496.6754 145303.3098 220099.21
NPV= Sum of discounted CF= 129972.59
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