Question

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $385,000 is estimated to result in $145,000 in annual pretax cost savings. The press falls in the ve-year MACRS class, and it will have a salvage value of $45,000 at the end of the project. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $3,100 in inventory at the end of each succeeding project year. At the end of the project all working capital is recovered.

If the shop's tax rate is 22% and its discount rate is 9%, should the company buy and install the machine press?

Answer 1

The company should buy and install the machine press as it's profitable since there's a profit of $67380.67.

The net present value is simply the difference between the present value of the cash inflows and the present value of the cash outflows over a period of time.

From the information attached, it can be seen that the net present value is given as $67380.67. Therefore, in this case, it's profitable for the company to buy and install the machine press.

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