CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2712754 • 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
The depreciation schedule is as follows:
Total Depreciation = $409,464
Book Value at the end of 4 years = 495,000 - 409,464 = $85,536
Salvage Value = $60,000
After Tax Salvage Value = 60000 + (85536 -60000) * 40% = $70214.4
The NPV of the project is the sum of the discounted cash flows = $32,921.51
Year Percentage Depreciation Depreciation Amount 1 20% 99000 2 32% 158400 3 19.20% 95040 4 11.52% 57024