CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2714507 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $493,000 is estimated to result in $192,000 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 $59,000. The press also requires an initial investment in spare parts inventory of $21,800, along with an additional $3,800 in inventory for each succeeding year of the project. The shop’s tax rate is 34 percent and its discount rate is 12 percent.
What is the NPV?
Explanation / Answer
The Four year Project to improve the production efficiency by buying a new machine press with shop's tax rate 34% and its discount rate is 12%, the NAV will be: (Amount Figure in $)
So, the project will not be considered as it is having a negative NAV i.e. $ 77687 due to Shop's tax rate being as high as 34% on the Annual pretax cost savings.
Period Cost / Pretax cost savings Inventory cost Total Cost / Pretax savings Net saving after tax Discount-Acc NAV of Savings Salvage value Net NAV 0 (493000) (21800) (514800) (514800) 1 192000 (3800) 188200 124212 1.12 110904 110904 2 192000 (3800) 188200 124212 1.25 99370 99370 3 192000 (3800) 188200 124212 1.40 88723 88723 4 192000 (3800) 188200 124212 1.57 79116 59000 138116 NAV (77687)