Warmack Machine Shop is considering a four-year project to improve its productio

Question

Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new 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’s tax rate is 35 percent and its discount rate is 9 percent. MACRS schedule Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ Should the company buy and install the machine press?

Explanation / Answer

Since NPV of the Project is positive,the company should buy and install the machine press.

Working Note

Depreciation

Salvage Value

Year 0 1 2 3 4 Pre Tax Cost Savings 180000 180000 180000 180000 Less: Depreciation 90000 144000 86400 51840 90000 36000 93600 128160 Tax @ 35% 31500 12600 32760 44856 Net Savings 58500 23400 60840 83304 Add Depreciation 90000 144000 86400 51840 Operating Cash Flow 148500 167400 147240 135144 Initial Cost -450000 Net Working Capital -18000 -2300 -2300 -2300 -2300 Net Working Capital 27200 Net Salvage Value 76616 Total Cash Flow -468000 146200 165100 144940 236660 PV factor @9% 1 0.917431 0.841679993 0.77218348 0.708425211 NPV PV of Cash Flows -468000 134128.4 138961.37 111920.27 167655.91 84665.99

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