Please help and please show your work. Warmack machine Shop is considering a fou
ID: 2716530 • Letter: P
Question
Please help and please show your work.
Warmack machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for 480,000 dollors is estimated to result in 195,000 dollors 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 81,000 dollors. The press also requires an initial investment in spare parts inventory of 21,000, along with an additional 2,600 dollors 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. Should the company buy and install the machine press?Explanation / Answer
MACRS Depreciation 20.00% 32.00% 19.20% 11.52% Details Year 0 Year 1 Year 2 Year 3 Year 4 Asset Value 480,000 Depreciation 96,000 153,600 92,160 55,296 Salvage 81,000 Book Value 82,944 Capital Loss (1,944) Machine cost (480,000) Salvage 81,000 Investment in spares (21,000) (2,600) (2,600) (2,600) Revenue increase/cost saving 195,000 195,000 195,000 195,000 Depreciation (96,000) (153,600) (92,160) (55,296) Capital Loss (1,944) Net Income before Tax 99,000 41,400 102,840 137,760 Tax @30% 29,700 12,420 30,852 41,328 Net Income After Tax 69,300 28,980 71,988 96,432 Add back depreciation 96,000 153,600 92,160 55,296 Total Cash flow (including NWC & Salvage) 144,300 179,980 161,548 230,128 Discount factor@8% 1 0.926 0.857 0.794 0.735 PV of Cash Flows (480,000) 133,611 154,304 128,242 169,151 NPV = $ 105,308 As the NPV is positive , the machine should be bought & installed