Purple Haze Machine Shop is considering a four-year project to improve its produ
ID: 2760990 • Letter: P
Question
Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $510752 is estimated to result in some amount of annual pretax cost savings. The press will have an aftertax salvage value at the end of the project of $87902. The OCFs of the project during the 4 years are $170613, $196520, $174470 and $164265, respectively. The press also requires an initial investment in spare parts inventory of $20172, along with an additional $1941 in inventory for each succeeding year of the project. The shop's discount rate is 6 percent. What is the NPV for this project? (Answer: 166564)
Explanation / Answer
SOLUTION :
Year
cash flow**
Discount factor@6%
Present value
0
-530924
1
- 530,924
1
168672
0.943396226
159,125
2
194579
0.88999644
173,175
3
172529
0.839619283
144,859
4
278162
0.792093663
220,330
NPV
166,564
Year
**calculation of cash flow
0
new machine cost+investment in spare parts inventory
-510752-20172
-530924
1
OCF-additional inventory investment
170613-1941
168672
2
OCF-additional inventory investment
196520-1941
194579
3
OCF-additional inventory investment
174470-1941
172529
4
OCF+salvage-additional inventory investment+working capital recovered
164265+87902-1941+20172+(1941*4)
278162
Year
cash flow**
Discount factor@6%
Present value
0
-530924
1
- 530,924
1
168672
0.943396226
159,125
2
194579
0.88999644
173,175
3
172529
0.839619283
144,859
4
278162
0.792093663
220,330
NPV
166,564
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