CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2711887 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $495,000 is estimated to result in $194,000 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 $60,000. The press also requires an initial investment in spare parts inventory of $22,000, along with an additional $4,000 in inventory for each succeeding year of the project. The shop’s tax rate is 40 percent and its discount rate is 11 percent. Requirement 1: Calculate the NPV.
Explanation / Answer
Calculation of NPV Year Cash Flow Inventory Salvage Total Cash flow Tax @40% Net cash flow PVAF@11% amount 0 ($495,000.00) ($22,000.00) ($517,000.00) ($206,800.00) ($310,200.00) 1 ($310,200.00) 1 $194,000.00 ($4,000.00) $190,000.00 $76,000.00 $114,000 0.900 $102,600.00 2 $194,000.00 ($4,000.00) $190,000.00 $76,000.00 $114,000 0.810 $92,340.00 3 $194,000.00 ($4,000.00) $190,000.00 $76,000.00 $114,000 0.730 $83,220.00 4 $194,000.00 ($4,000.00) $60,000 $250,000.00 $100,000.00 $150,000 0.660 $99,000.00 NPV $66,960.00