Geller Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $400,000 is estimated to result in $155,000 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 $68,000. The press also requires an initial investment in spare parts inventory of $13,000, along with an additional $1,800 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and the project's required return is 10 percent. Refer to Table 8.3.what is the NPV of this project? TABLE 8.3Depreciation under ModifiedAccelerated Cost RecoverySystem (MACRS)RECOVERY PERIOD CLASS5 YEARS7 YEARSYEAR3 YEARS10 YEARS15 YEARS20 YEARS1.33332000.1429.1000.0500.037502.444532002449.1800.0950.072193.1481.1920.1749.1440.0855.066774.0741.1152.1249.1152.0770.06177.1152.0893.0922.0693.057136.0576.0892.0737.0623.052857.0893.0655.0590,04888.0446.0655.0590.04522.0656.0591.0446210.0655.0590.0446111.0328.0591.04462120590.0446113.0591.0446214.0590.0446115.0591.0446216.0295.0446117.0446218.0446119.0446220.0446121.02231Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Propertyand other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six years because theIRS assumes purchase is made in midyear.

Year EBDT Depreciation Rate Depreciation (Cost*Rate) PBT(EBDT -Depreciation) Tax@22%(PBT*Rate) Net Income(PBT-Tax) Operating Cash flows(Depreciation +Net Income) Net working capital Investment incremental cash flow(Operating Cash flow +Net working capital + investment) PVF@10% Present Value(Incremental Cashflow * Discount Factor) 0 -13000 -400000 -413000 1 -413000 1 155000 0.2000 80000 75000 16500 58500 138500 -1800 136700 0.909 124260.30 2 155000 0.3200 128000 27000 5940 21060 149060 -1800 147260 0.826 121636.76 3 155000 0.1920 76800 78200 17204 60996 137796 -1800 135996 0.751 102133.00 4 155000 0.1152 46080 108920 23962 84958 131038 18400 68246 217684 0.683 148677.90 330880 Net Present Value 83707.95Assets Cost 400000 Less: Depreciation Charged 330880 WDV of Machine at the time of sale 69120 Sales value of machine 68000 loss on sales -1120 Less: Tax@22% -246 After tax cash flow from sales of assets 68246

Answered: the MACRS five-year class, and it will…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Geller Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $400,000 is estimated to result in $155,000 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 $68,000. The press also requires an initial investment in spare parts inventory of $13,000, along with an additional $1,800 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and the project's required return is 10 percent. Refer to Table 8.3.

what is the NPV of this project?

TABLE 8.3
Depreciation under Modified
Accelerated Cost Recovery
System (MACRS)
RECOVERY PERIOD CLASS
5 YEARS
7 YEARS
YEAR
3 YEARS
10 YEARS
15 YEARS
20 YEARS
1
.3333
2000
.1429
.1000
.0500
.03750
2
.4445
3200
2449
.1800
.0950
.07219
3
.1481
.1920
.1749
.1440
.0855
.06677
4
.0741
.1152
.1249
.1152
.0770
.06177
.1152
.0893
.0922
.0693
.05713
6
.0576
.0892
.0737
.0623
.05285
7
.0893
.0655
.0590
,04888
.0446
.0655
.0590
.04522
.0656
.0591
.04462
10
.0655
.0590
.04461
11
.0328
.0591
.04462
12
0590
.04461
13
.0591
.04462
14
.0590
.04461
15
.0591
.04462
16
.0295
.04461
17
.04462
18
.04461
19
.04462
20
.04461
21
.02231
Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Property
and other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six years because the
IRS assumes purchase is made in midyear.

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