Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $425,000 is estimated to result in $169,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $69,000. The press also requires an initial investment in spare parts inventory of $28,000, along with an additional $3,500 in inventory for each succeeding year of the project. The shop’s tax rate is 23 percent and its discount rate is 10 percent. 1. Calculate the NPV of this project.
2. Should the company buy and install the machine press?
A. No.
B. Yes.