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 $511356 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 $86133. The OCFs of the project during the 4 years are $175864, $193137, $171700 and $164284, respectively. The press also requires an initial investment in spare parts inventory of $20630, along with an additional $2498 in inventory for each succeeding year of the project. The shop's discount rate is 8 percent. What is the NPV for this project?

Explanation / Answer

Year 0 1 2 3 4 Operating Cash Flow (a) $0.00 $175,864.00 $193,137.00 $171,700.00 $164,284.00 Post tax salvage Value of Machine (b) $0.00 $0.00 $0.00 $0.00 $86,133.00 Working Capital (c ) -$20,360.00 -$2,498.00 -$2,498.00 -$2,498.00 $27,854.00 Initial Investment (d) -$511,356.00 $0.00 $0.00 $0.00 $0.00 Net Cashflow (e=a+b+c+d) -$531,716.00 $173,366.00 $190,639.00 $169,202.00 $278,271.00 PV Factor at 8% (f) 1.0000 0.9259 0.8573 0.7938 0.7350 Present Value at 8% (e*f) -$531,716.00 $160,524.07 $163,442.22 $134,318.00 $204,537.49 NPV = $131,105.78 (Sum of Present value of cashflows)

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