CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2647579 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $503,000 is estimated to result in $202,000 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 $64,000. The press also requires an initial investment in spare parts inventory of $22,800, along with an additional $4,800 in inventory for each succeeding year of the project. The shop
Explanation / Answer
Depreciation Year Amount 5 Year Depreciation 1 503000 20% 100600 2 503000 32% 160960 3 503000 19.20% 96576 4 503000 11.52% 57945.6 416081.6 Year Cash Inflow Cash Inflow Depreciation Cash Inflow after Depreciation Tax @40% Net Cash Inflow Cash Inflow: Adding back Depreciation PVIF(11%, 4 Yrs) Present Value 0 =-503000-22800 -525800 -525800 -525800 -525800 1 -525800 1 =202000-4800 197200 100600 96600 38640 57960 158560 0.9009 142846.7 2 =202000-4800 197200 160960 36240 14496 21744 182704 0.8116 148282.6 3 =202000-4800 197200 96576 100624 40249.6 60374.4 156950.4 0.7312 114762.1 4 =202000+64000-4800 261200 57945.6 203254.4 81301.76 121952.6 179898.2 0.6587 118499 NPV -1409.63