Purple Haze Machine Shop is considering a four-year project to improve its produ
ID: 2640016 • Letter: P
Question
Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $410,000 is estimated to result in $160,000 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 $69,000. The press also requires an initial investment in spare parts inventory of $14,000, along with an additional $1,900 in inventory for each succeeding year of the project. The shop
Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $410,000 is estimated to result in $160,000 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 $69,000. The press also requires an initial investment in spare parts inventory of $14,000, along with an additional $1,900 in inventory for each succeeding year of the project. The shop
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Step 1: Calculate Annual Depreciation:
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Step 2: Calculate After Tax Salvage Value:
Book Value of Machine at the End of 4 Years = 410000 - (82000 - 131200- 78720 -47232) = 70848
After Tax Salvage Value = 69000 + (70848 - 69000)*30% = 69554.40
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Step 3: Calculate Operating Cash Flow:
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Step 4: Calculate NPV:
NPV = -410000 - 14000 + (136600 - 1900)/(1+8%) + (151360 - 1900)/(1+8%)^2 + (135616 - 1900)/(1+8%)^3 + (126169.6 + 14000 + 69554.40 +3*1900)/(1+.08)^4 = $93351.23
Answer is $93351.23 or $93351.
Thanks.
Rate Depreciation Year 1 20.00% 82000 Year 2 32.00% 131200 Year 3 19.20% 78720 Year 4 11.52% 47232Related Questions
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