Chapman Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $576,000

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. Deprec1 = $576,000 × 0.20 = $115,200 Deprec2 = $576,000 × 0.32 = $184,320 Deprec3 = $576,000 × 0.1920 = $110,592 Deprec4 = $576,000 × 0.1152 = $66,355.20 Book value4 = $576,000 - $115,200 - $184,320 - $110,592 - $66,355.20 = $99,532.80 Aftertax salvage value = $84,000 + ($99,532.80 - $84,000)(0.35) = $89,436.48 OCF1 = $192,000(1 - 0.35) + $115,200(0.35) = $165,120 OCF2 = $192,000(1 - 0.35) + $184,320(0.35) = $189,312 OCF3 = $192,000(1 - 0.35) + $110,592(0.35) = $163,507.20 OCF4 = $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.

101.

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $427,000, has a 6-year life, and requires $115,000 in pretax annual operating costs. System B costs $502,000, has an 8-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why?    A.  A; The net present value is $211,516. B.  A; The net present value is -$588,792. C.  A; The net present value is -$314,216. D.  B; The net present value is $308,222. E.  B: The net present value is -$612,240.   System A should be chosen because it has the more positive (smaller negative) net present value.