machine press for $450,000 is estimated to result in $180,000 in annual pretax c

Question

machine press for $450,000 is estimated to result in $180,000 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 $76,000. The press also requires an initial investment in spare parts inventory of $18,000, along with an additional $2,300 in inventory for each succeeding year of the project. The shop

machine press for $450,000 is estimated to result in $180,000 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 $76,000. The press also requires an initial investment in spare parts inventory of $18,000, along with an additional $2,300 in inventory for each succeeding year of the project. The shop

Explanation / Answer

Initial investment = 450,000 + 18,000 = $ 468,000

Yearly saving = (1 - 0.35)*180,000 = $ 117,000

Additional cost each year = $ 2,300

Net saving each year = (117,000 - 2,300) = $ 114,700

Hence NPV = $ 27,537.8

NPV of Saving yr 1 = 105229.36

NPV of Saving yr 2 = 96540.7

NPV of Saving yr 3 = 88569.45

NPV of Saving yr 4 = 81256.37

NPV of Saving yr 5 = 123941.92

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