CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2711928 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $496,000 is estimated to result in $195,000 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 $60,500. The press also requires an initial investment in spare parts inventory of $22,100, along with an additional $4,100 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 12 percent.
Requirement 1: Calculate the NPV. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Year 0 1 2 3 4 Investment (496,000) savings 195,000 195,000 195,000 195,000 Inventory (22,100) Inventory (4,100) (4,100) (4,100) (4,100) Depreciation rate 20.00% 32.00% 19.20% 11.52% Depreciation (99,200) (158,720) (95,232) (57,139) Income before tax 91,700 32,180 95,668 133,761 Tax @ 30% 27,510 9,654 28,700 40,128 Income after tax 64,190 22,526 66,968 93,633 Add dep 163,390 181,246 162,200 150,772 After tax cash fows 227,580 203,772 229,167 244,404 Salvage value 60,500 Total cash flows (518,100) 227,580 203,772 229,167 304,904 PV @ 8% (518,100) 210,722 174,702 181,920 224,114 NPV 273,357.96