Question

SM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $435,000 is estimated to result in $164,000 in annual pretax cost savings. The press is eligible for 100 percent bonus depreciation and it will have a salvage value at the end of the project of $65,000. The press also requires an initial investment in spare parts inventory of $17,000, along with an additional $4,000 in inventory for each succeeding year of the project. The shop’s tax rate is 25 percent and its discount rate is 12 percent.

Answer 1

The NPV of the four-year project to improve SM Machine Shop's production efficiency is -$49,257.

What is the NPV?

The Net Present Value (NPV) is the difference between a project's cash inflows and outflows at a discounted rate.

The implication is that the cash inflows and cash outflows are discounted to their present values to determine the NPV.

The NPV can be computed using the NPV formula or PV Annuity factors as follows:

Data and Calculations:

Annual savings (pretax) = $164,000

After-tax savings = $123,000 ($164,000 x 1 - 25%)

Project period = 4 years

Discount rate = 12%

                                 Cash           PV Factor           Present Value

Investment         -$435,000             1                      -$435,000

Initial inventory     -$17,000             1                            -17,000

Annual inventory   -$4,000         3.037                         -12,148    

After-tax savings $123,000         3.037                    $373,551

Salvage value       $65,000        0.636                         41,340

Net present value (NPV)                                        -$49,257

Question Completion:

Calculate the project's NPV.

Thus, the NPV of the four-year project to improve SM Machine Shop's production efficiency is -$49,257.

Learn more about the NPV at brainly.com/question/17185385

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