CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2715417 • 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. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
NPV = $ 32,921.51
Year 0 Year 1 Year 2 Year 3 Year 4 Machine Cost [a] -495000 Annual pretax cost savings [b] 194000 194000 194000 194000 Salvage Value [c] 60000 Initial investment in spare parts [d] -22000 -4000 -4000 -4000 34000 Depreciation Tax rate [e] 20% 32% 19.20% 11.52% Depreciation Expenses [f = 495000*e] 99,000 158,400 95,040 57,024 Accumulated Depreciation till 4 year [g = sum of f] 409,464 Book Value of Machine at year 4 [h = 495000-g] 85,536 Loss on Salvage Value [i= c- h] 25,536 Post Tax salvage Value [j = c + i*40%] 70,214.40 Annual posttax cost savings [k = b*(1-40%)] 116,400.00 116,400.00 116,400.00 116,400.00 Depreciation Tax Shield [l= f*40%] 39,600.00 63,360.00 38,016.00 22,809.60 Cash Flow [m= a+d+j+k+l] - 517,000.00 152,000.00 175,760.00 150,416.00 243,424.00 PV Factor @ 11% [n] 1.00000 0.90090 0.81162 0.73119 0.65873 PV of Cash Flow [o = m*n] - 517,000.00 136,936.94 142,650.76 109,982.88 160,350.93 NPV [p = sum of o] 32,921.51