Yasmin Machine Shop is considering a four-year project to improve its production
ID: 2793343 • Letter: Y
Question
Yasmin Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $570,000 is estimated to result in $240,000 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 $96,000. The press also requires an initial investment in spare parts inventory of $30,000, along with an additional $3,500 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. Refer to Table 8.3.
Yasmin Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $570,000 is estimated to result in $240,000 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 $96,000. The press also requires an initial investment in spare parts inventory of $30,000, along with an additional $3,500 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. Refer to Table 8.3.
Explanation / Answer
First of all,we have to calculate depreciation
D1 = $570000*0.2 = 114000
D2 = $570000*0.32 = 182400
D3 = $570000*0.1920 = $109440
D4 = $570000*0.1152 = $65664
Remaining book value = $570000-(114000+182400+109440+65664) =$98496
The asset is sold at aloss of 98496-96000 = $2496 which will result in tax saving of 873.6
there fore the salvage value will be 96000+873.6 =96873.6
Cash flow will be calculated as follows
NPV =776533.4-30000-570000 =176533.4
It is assumed that initial investment and spare parts will be returned at same value after the project is finished.
Year Cash flow After tax cash flow Tax savings on dep Addtnl investment Total CF PVf @8% DisccF 1 240000 168000 34200 202200 0.925926 187222.2 2 240000 168000 54720 -3500 222720 0.857339 190946.5 3 240000 168000 32832 -3500 200832 0.793832 159426.9 4 240000 168000 19699.2 -3500 187699.2 0.73503 137964.5 4 96873 96873 0.73503 71204.55 4 40500 (10500+30000) 40500 0.73503 29768.71 776533.4Related Questions
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