Problem:
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $835,200 is estimated to result in $278,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $121,800. The press also requires an initial investment in spare parts inventory of $34,800, along with an additional $5,220 in inventory for each succeeding year of the project.
Required:
Question: If the shop's tax rate is 31 percent and its discount rate is 17 percent, what is the NPV for this project?
Note: Provide support for your underlying principle.