Tanaka Machine Shop is considering a four-year project to improve its productionefficiency. Buying a new machine press for $485,000 is estimated to result in $205,000in annual pretax cost savings. The press falls in the MACRS five-year class, and it willhave a salvage value at the end of the project of $74,000. (MACRS schedule) The pressalso requires an initial investment in spare parts inventory of $40,000, along with anadditional $4,100 in inventory for each succeeding year of the project. The shop's taxrate is 25 percent and its discount rate is 8 percent. Calculate the NPV of this project.(Do not round intermediate calculations and round your answer to 2 decimal places,e.g., 32.16.)NPVShould the company buy and install the machine press?No○ Yes

The problem involves the determination of the NPV or the net present value. NPV pertains to the…

Answered: Tanaka Machine Shop is considering a…

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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1
Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $424,000 is estimated to result in $164,000 in annual pre-tax cost savings. The press falls into Class 8 for CCA purposes (CCA rate of 20% per year), and it will have a salvage value at the end of the project of $56,400. The press also requires an initial investment in spare parts inventory of $34,000, along with an additional $4,500 in inventory for each succeeding year of the project. If the shop's tax rate is 35% and its discount rate is 9%. Calculate the NPV of this project. (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV Should the company buy and install the machine press? Yes No

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