Purple Haze Machine Shop is considering a four-year project to improve its produ

Question

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $470,000 is estimated to result in S190,000 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 580,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional S2,500 in inventory for each succeeding year of the project. The shop's tax rate is 35 percent and its discount rate is 9 percent. Refer to Table 10.7. Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places, (e.g., 32.16))

Explanation / Answer

SOLUTION:

First, we calculate the depreciation for each year.

D1 = $470,000 * (.2000) = $94,000

D2 = $470,000 * (.3200) = $150,400

D3 = $470,000 * (.1920) = $90,240

D4 = $470,000 * (.1152) = $54,144

The book value of the machine at the end of the project.

BV4 = $470,000

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