CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2626389 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $500,000 is estimated to result in $199,000 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 $62,500. The press also requires an initial investment in spare parts inventory of $22,500, along with an additional $4,500 in inventory for each succeeding year of the project. The shop
Explanation / Answer
It has been assumed that the inventory will stay invested in the business. Please check if this works now
Note:
Calculation of NPV Year 0 1 2 3 4 Annual pretax cost savings $ 199,000.00 $ 199,000.00 $ 199,000.00 $ 199,000.00 Less: MACRS Depreciation $ (100,000.00) $ (160,000.00) $ (96,000.00) $ (57,600.00) Annual pretax savings after depreciation $ 99,000.00 $ 39,000.00 $ 103,000.00 $ 141,400.00 Less: Tax @ 30% $ (29,700.00) $ (11,700.00) $ (30,900.00) $ (42,420.00) Annual after tax cost savings $ 69,300.00 $ 27,300.00 $ 72,100.00 $ 98,980.00 Add: MACRS Depreciation $ 100,000.00 $ 160,000.00 $ 96,000.00 $ 57,600.00 Annual operating cash flow $ 169,300.00 $ 187,300.00 $ 168,100.00 $ 156,580.00 Cost of Machine $ (500,000.00) Increase in inventory $ (22,500.00) $ (4,500.00) $ (4,500.00) $ (4,500.00) After tax salvage of machine $ 55,330.00 Project Cash flows $ (522,500.00) $ 164,800.00 $ 182,800.00 $ 163,600.00 $ 211,910.00 P.V. factor @ 12% 1.00000 0.89286 0.79719 0.71178 0.63552 P.V. of cash flows $ (522,500.00) $ 147,142.86 $ 145,727.04 $ 116,447.25 $ 134,672.64 NPV of Project (Sum of P.V. of cash flows) $ 21,489.78 (Answer)