Warmack Machine Shop is considering a four-year project to improve its productio
ID: 2819282 • Letter: W
Question
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $510,000 is estimated to result in $210,000 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 $86,000. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $2,900 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 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.)
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $510,000 is estimated to result in $210,000 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 $86,000. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $2,900 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. (MACRS schedule)
Explanation / Answer
Calculation of depreciation over project
Book value at end of project = $510000 - $421872= $88128
Loss on sale = $88128 - $86000 = $2128
After tax salvage value = 86000 + $2128 * 0.30 = $86638.4
Calculation of present value of cash flows
NPV = -534000 + 161759.3 + 165517.8 + 137710.8 + 182555.248 = +113543.18
Year MACRS rate Depreciation 1 0.2 102000 2 0.32 163200 3 0.192 97920 4 0.1152 58752 total 421872Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.