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 $1,104,000 is estimated to result in $368,000 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 $161,000. The press also requires an initial investment in spare parts inventory of $46,000, along with an additional $6,900 in inventory for each succeeding year of the project.

If the shop\'s tax rate is 31 percent and its discount rate is 13 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

A.$-49,638.87

B.$-46,042.62

C.$-166,739.25

D.$-52,120.82

E.$-47,156.93

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,104,000 is estimated to result in $368,000 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 $161,000. The press also requires an initial investment in spare parts inventory of $46,000, along with an additional $6,900 in inventory for each succeeding year of the project.

Property Class Three-Year 33.33% 44.45 14.81 7.41 Year Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 Five-Year 2 3 4 5 6 7 8 20.00% 32.00 19.20 11.52 11.52 5.76

Solution

Depreciation Year Rate Depreciation = $1104000 x Dep. Rate 1 20.00% $220,800.00 2 32.00% $353,280.00 3 19.20% $211,968.00 4 11.52% $127,180.80 Total Depreciation $913,228.80 The book value of the equipment at the end of the project = $$1104000 - $730,583.04 $190,771.20 After-tax salvage value = $161,000 + ($152,616.96 – 161,000)(0.34) $170,229.07 Year 0 1 2 3 4 Annual pretax cost savings $368,000.00 $368,000.00 $368,000.00 $368,000.00 Less: Depreciation -$220,800.00 -$353,280.00 -$211,968.00 -$127,180.80 EBT $147,200.00 $14,720.00 $156,032.00 $240,819.20 Less: Tax @ 31% -$45,632.00 -$4,563.20 -$48,369.92 -$74,653.95 Net Income $101,568.00 $10,156.80 $107,662.08 $166,165.25 Add: Depreciation $220,800.00 $353,280.00 $211,968.00 $127,180.80 Operating Cash Flow $322,368.00 $363,436.80 $319,630.08 $293,346.05 Initial Investment -$1,104,000.00 Net Working Capital -$46,000.00 -$6,900.00 -$6,900.00 -$6,900.00 $66,700.00 After Tax Salvage Value $170,229.07 Net Operating Cash Flow -$1,150,000.00 $315,468.00 $356,536.80 $312,730.08 $530,275.12 PV @ 13% 1.0000 0.8850 0.7831 0.6931 0.6133 Present Value -$1,150,000.00 $279,175.22 $279,220.61 $216,737.63 $325,227.66 NPV -$49,638.87