Chapman Machine Shop is considering a 4-year project to improve its production efficiency.Buying a new machine press for $576,000 is estimated to result in $192,000 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 $84,000.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?
A)no; The net present value is -$7,489.
B)no; The net present value is -$667.
C)yes; The net present value is $211.
D)yes; The net present value is $4,319.
E)yes; The net present value is $8,364.

Question

Chapman Machine Shop is considering a 4-year project to improve its production efficiency.Buying a new machine press for $576,000 is estimated to result in $192,000 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 $84,000.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? 
A)no; The net present value is -$7,489. 
B)no; The net present value is -$667. 
C)yes; The net present value is $211. 
D)yes; The net present value is $4,319. 
E)yes; The net present value is $8,364.

Quizplus · Accepted Answer

Deprec₁ = $576,000 × 0.20 = $115,200Deprec₂ = $576,000 × 0.32 = $184,320Deprec₃ = $576,000 × 0.1920 = $110,592Deprec₄ = $576,000 × 0.1152 = $66,355.20Book value₄ = $576,000 - $115,200 - $184,320 - $110,592 - $66,355.20 = $99,532.80Aftertax salvage value = $84,000 + ($99,532.80 - $84,000)(0.35) = $89,436.48OCF₁ = $192,000(1 - 0.35) + $115,200(0.35) = $165,120OCF₂ = $192,000(1 - 0.35) + $184,320(0.35) = $189,312OCF₃ = $192,000(1 - 0.35) + $110,592(0.35) = $163,507.20OCF₄ = $192,000(1 - 0.35) + $66,355.20(0.35) = $148,024.32 The machine should not be purchased because the net present value is negative.

Chapman Machine Shop Is Considering a 4-Year Project to Improve