CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2649182 • 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
So, the answer is NPV = 1,73,210.21
Notes and assumptions:
First, we get depreciation table:
Also, at the end of 4th year (Opening value of 5th year) is 1,90,179.73 and salvage value is 57,000. So loss of (57,000- 1,90,179.73) can be taken to tax saving. Hence cash saving = 30% of 1,33,179.73 = 39,954 is considered for the answer, as calculated in the below table:
A B C D =A+B+C E D*E Year Cash Tax After tax cash Depreciation Inventory Inv Net cash Discount factor @12% NPV 0 -4,89,000 -4,89,000 0 -21400 -5,10,400 1.00 -5,10,400 1 1,88,000 -56,400 1,31,600 97,800 -3400 2,26,000 0.8929 2,01,786 2 1,88,000 -56,400 1,31,600 1,25,184 -3400 2,53,384 0.7972 2,01,996 3 1,88,000 -56,400 1,31,600 51,075 -3400 1,79,275 0.7118 1,27,604 4 1,88,000 -56,400 1,31,600 24,761 -3400 1,52,961 0.6355 97,210 4 (For salvage value) 57,000 39,954 96,954 0 96,954 0.5674 55,014 NPV 1,73,210.21