Geary 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 $1,017,600 is estimated to result in $339,200 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 $148,400. The press also requires an initial investment in spare parts inventory of $42,400, along with an additional $6,360 in inventory for each succeeding year of the project. If the shop\'s tax rate is 33 percent and its discount rate is 9 percent, what is the NPV for this project?

Solution

Year

Annual Pretax cost savings

Depreciation

Profits before tax

Tax rate 33%. Profit after tax is 67% i.e (100-33%)

Cash flows after tax

Investment

Working capital

Total cash flows

PV at 9%

Presnt Value

0

-1017600

42400

-1017600

1

-1017600

1

$339200

20%= 203520

135680

90905

294425

-6360

288065

.9174

264270

2

$339200

32%= 325632

13568

9090

334722

-6360

328362

.8417

276382

3

$339200

19.20%= 195379

143821

96360

291739

-6360

285379

.7722

220370

4

$339200

11.52%= 117227

221973

148721

265948

148400

61480

475828

.7084

337076

Net Present value

80498

Year	Annual Pretax cost savings	Depreciation	Profits before tax	Tax rate 33%. Profit after tax is 67% i.e (100-33%)	Cash flows after tax	Investment	Working capital	Total cash flows	PV at 9%	Presnt Value
0						-1017600	42400	-1017600	1	-1017600
1	$339200	20%= 203520	135680	90905	294425		-6360	288065	.9174	264270
2	$339200	32%= 325632	13568	9090	334722		-6360	328362	.8417	276382
3	$339200	19.20%= 195379	143821	96360	291739		-6360	285379	.7722	220370
4	$339200	11.52%= 117227	221973	148721	265948	148400	61480	475828	.7084	337076
									Net Present value	80498