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Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $620,000 is estimated to...
Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $620,000 is estimated to result in $211,000 in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of $98,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $3,600 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop's tax rate is 35 percent and its discount rate is 11 percent. Should the firm buy and install the machine press? Why or why not?
Yes; The net present value is $4,319.
No; The net present value is -$6,329.
Yes; The net present value is $4,679
No; The net present value is $211.
Yes; The net present value is $38,364.
Depr1 = $620,000 ×.20 = $124,000
Depr2 = $620,000 ×.32 = $198,400
Depr3 = $620,000 ×.1920 = $119,040
Depr4 = $620,000 ×.1152 = $71,424
BV4 = $620,000 - 124,000 - 198,400 - 119,040 - 71,424 = $107,136
Aftertax salvage value = $98,000 + ($107,136 - 98,000)(.35) = $101,197.60
OCF1 = $211,000(1 - .35) + $124,000(.35) = $180,550
OCF2 = $211,000(1 - .35) + $198,400(.35) = $206,590
OCF3 = $211,000(1 - .35) + $119,040(.35) = $178,814
OCF4 = $211,000(1 - .35) + $71,424(.35) = $162,148.40
NPV = -$620,000 - 24,000 + ($180,550 - 3,600) / 1.11 + ($206,590 - 3,600) / 1.112 + ($178,814 - 3,600) / 1.113 + ($162,148.40 + 34,800 + 101,197.60) / 1.114 = $4,679
The machine should be purchased because the net present value is positive.
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