CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2650079 • 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
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
Year 0 Cash Flow = new machine Cost + initial investment in spare parts inventory
Year 0 Cash Flow = 503000 + 22800
Year 0 Cash Flow = 525800
Year 1 Cash flow = Post tax cost saving + Deprection tax shield - investment in working capital
Year 1 Cash flow = 202000*(1-40%) + 503000*20%*40% - 4800
Year 1 Cash flow = $ 156,640
Year 2 Cash flow = Post tax cost saving + Deprection tax shield - investment in working capital
Year 2 Cash flow = 202000*(1-40%) + 503000*32%*40% - 4800
Year 2 Cash flow = $ 180784
Year 3 Cash flow = Post tax cost saving + Deprection tax shield - investment in working capital
Year 3 Cash flow = 202000*(1-40%) + 503000*19.2%*40% - 4800
Year 3 Cash flow = $ 155,030.40
Year 4 Cash flow = Post tax cost saving + Deprection tax shield + working capital realised back + Post tax salvage Value
Year 4 Cash flow = 202000*(1-40%) + 503000*11.52%*40% +( 22800 + 4800*3) + (64000 - (64000-503000*(11.52%+5.76%))*40%)
Year 4 Cash flow = $ 254,745.60
NPV = - 525800 + 156640/1.11 + 180784/1.11^2 + 155030.40/1.11^3 + 254745.60/1.11^4
NPV = $ 43,211.18