Tanaka Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $151,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $51,000. The press also requires an initial nvestment in spare parts inventory of $22,000, along with an additional $3,200 in nventory for each succeeding year of the project. The shop's tax rate is 22 percent and ts discount rate is 9 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.)
Tanaka Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $151,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $51,000. The press also requires an initial nvestment in spare parts inventory of $22,000, along with an additional $3,200 in nventory for each succeeding year of the project. The shop's tax rate is 22 percent and ts discount rate is 9 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Hello! I need help with this question. Its attached, alongside the schedule. Thanks so much!
Transcribed Image Text:Tanaka Machine Shop is considering a 4-year project to improve its production
efficiency. Buying a new machine press for $395,000 is estimated to result in $151,000 in
annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a
salvage value at the end of the project of $51,000. The press also requires an initial
investment in spare parts inventory of $22,000, along with an additional $3,200 in
inventory for each succeeding year of the project. The shop's tax rate is 22 percent and
its discount rate is 9 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.)
NPV
Should the company buy and install the machine press?
Yes
O No
Transcribed Image Text:Table 6.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS)
Year 3 Years
1
.3333
2
.4445
3
.1481
4
.0741
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
5 Years
2000
.3200
.1920
.1152
.1152
.0576
Recovery Period Class
7 Years
10 Years
.1429
.2449
.1749
.1249
.0893
.0892
.0893
.0446
. 1000
.1800
.1440
.1152
.0922
.0737
.0655
.0655
.0656
.0655
.0328
15 Years
.0500
.0950
.0855
.0770
.0693
.0623
.0590
.0590
.0591
.0590
.0591
.0590
.0591
.0590
.0591
.0295
20 Years
.03750
.07219
.06677
.06177
.05713
.05285
.04888
.04522
04462
.04461
.04462
.04461
.04462
.04461
04462
.04461
.04462
.04461
.04462
.04461
.02231
Depreciation is expressed as a percentage of the asset's initial cost. These schedules are based on IRS Publication 946, entitled How to Depreciate Property. Details of depreciation are presented later in the
chapter. Five-year depreciation actually carries over six years because the IRS assumes the purchase is made midyear.
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