Homework SourseGeary Machine Shop is considering a fouryear project to impr
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
Solution
The options are not matching . But I think my answer is correct.
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| 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 |
