CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2711970 • 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.
Explanation / Answer
Time line 0 1 2 3 4 Cost of equipment -496000 Installation cost 0 Total investment in new machine -496000 Net working capital -22100 -4100 -4100 -4100 -4100 =Initial Investment outlay -518100 Savings 195000 195000 195000 195000 MACR rate 20% 32% 19.20% 11.52% 17.28% -Depreciation MACR Rate* total investment -99200 -158720 -95232 -57139.2 85708.8 =Salvage value = 95800 36280 99768 137860.8 -taxes =(savings- depreciation)*(1-tax) 67060 25396 69837.6 96502.56 +Depreciation 99200 158720 95232 57139.2 =after tax operating cash flow 166260 184116 165069.6 153641.8 Reversal of Net working capital 38500 Proceeds from sale of assets =selling price*(1 - tax rate) 42350 +Salvage book value * tax rate 25712.64 Terminal year non operating cash flows 106562.6 Total Cash flow for the period -518100 162160 180016 160969.6 256104.4 Discount factor =(1+discount rate)^n 1 1.12 1.2544 1.404928 1.573519 Discount rate= 12% Discounted cash flows -518100 144785.7 143507.7 114575 162759 NPV= Sum of discounted cash flows 47527.33