CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2641573 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $489,000 is estimated to result in $188,000 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 $57,000. The press also requires an initial investment in spare parts inventory of $21,400, along with an additional $3,400 in inventory for each succeeding year of the project. The shop
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Annual Cash Flow Table:
After tax Cash Flow Year 4
Book Value = 489000*(1-20%-32%-19.20%-11.52%) = 84499.2
After Tax Cash Flow = 57000 -30%*(57000 - 84499.2) = 65249.76
NPV =-489000-21400+(160940-3400)/(1+0.12)^1+(178544-3400)/(1+0.12)^2+(159766.4-3400)/(1+0.12)^3+(148499.84+3400*3+21400+ 65249.76)/(1+0.12)^4 = $37107.06
Answer is $37107.06
Thanks.
Year Pretax Cost Savings Depreciation Rate Annual Depreciation Tax on Savings after Depreciation Tax on Savings after Depreciation and Tax Net Annual Cash Flow Including Depreciation 1 188000 20.00% 97800 90200 63140 160940 2 188000 32.00% 156480 31520 22064 178544 3 188000 19.20% 93888 94112 65878.4 159766.4 4 188000 11.52% 56332.8 131667.2 92167.04 148499.84