CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2725337 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $494,000 is estimated to result in $193,000 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 $59,500. The press also requires an initial investment in spare parts inventory of $21,900, along with an additional $3,900 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent and its discount rate is 11 percent.
Calculate the NPV. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $494,000 is estimated to result in $193,000 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 $59,500. The press also requires an initial investment in spare parts inventory of $21,900, along with an additional $3,900 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent and its discount rate is 11 percent.
Explanation / Answer
Calculation of NPV:
Year 0
Year 1
Year 2
Year 3
Year 4
Cost of Machine
$ (494,000.00)
Investment in Inventory
$ (21,900.00)
$ (3,900.00)
$ (3,900.00)
$ (3,900.00)
$ (3,900.00)
Annual Post Tax Cost Saving = 193000*(1-35%) =
$ 125,450.00
$ 125,450.00
$ 125,450.00
$ 125,450.00
Tax Saving on depreciation (See Note-1 below)
$ 34,580.00
$ 55,328.00
$ 33,196.80
$ 19,918.08
Salvage value
$ 59,500.00
Tax Saving on loss on sale of Machine
$ 9,052.12
Net Cash flow (CF)
$ (515,900.00)
$ 156,130.00
$ 176,878.00
$ 154,746.80
$ 210,020.20
PV of $ 1 (11%)
1.00000
0.90090
0.81162
0.73119
0.65873
1/(1+11%)^0
1/(1+11%)^1
1/(1+11%)^2
1/(1+11%)^3
1/(1+11%)^4
PV = CF* PV of $1 =
$ (515,900.00)
$ 140,657.66
$ 143,558.15
$ 113,149.53
$ 138,346.81
NPV = Sum of PVs
$ 19,812.15
Note-1:
Tax Saving on depreciation:
Cost of Machine
$ 494,000.00
$ 494,000.00
$ 494,000.00
$ 494,000.00
MACRS Depreciation %
20%
32%
19.20%
11.52%
Depreciation = Cost* Dep % =
$ 98,800.00
$ 158,080.00
$ 94,848.00
$ 56,908.80
Tax Saving on depreciation = Depreciation * 35% =
$ 34,580.00
$ 55,328.00
$ 33,196.80
$ 19,918.08
Note-2:
Calculation of Tax Saving on loss on sale of Machine :
Cost of Machine
$ 494,000.00
Less: Accumulated Depreciation
$ (408,636.80)
Book Value
$ 85,363.20
Less: Salve value
$ (59,500.00)
Loss on Sale
$ 25,863.20
Tax Saving = loss on sale * 35% =
$ 9,052.12
Calculation of NPV:
Year 0
Year 1
Year 2
Year 3
Year 4
Cost of Machine
$ (494,000.00)
Investment in Inventory
$ (21,900.00)
$ (3,900.00)
$ (3,900.00)
$ (3,900.00)
$ (3,900.00)
Annual Post Tax Cost Saving = 193000*(1-35%) =
$ 125,450.00
$ 125,450.00
$ 125,450.00
$ 125,450.00
Tax Saving on depreciation (See Note-1 below)
$ 34,580.00
$ 55,328.00
$ 33,196.80
$ 19,918.08
Salvage value
$ 59,500.00
Tax Saving on loss on sale of Machine
$ 9,052.12
Net Cash flow (CF)
$ (515,900.00)
$ 156,130.00
$ 176,878.00
$ 154,746.80
$ 210,020.20
PV of $ 1 (11%)
1.00000
0.90090
0.81162
0.73119
0.65873
1/(1+11%)^0
1/(1+11%)^1
1/(1+11%)^2
1/(1+11%)^3
1/(1+11%)^4
PV = CF* PV of $1 =
$ (515,900.00)
$ 140,657.66
$ 143,558.15
$ 113,149.53
$ 138,346.81
NPV = Sum of PVs
$ 19,812.15
Note-1:
Tax Saving on depreciation:
Cost of Machine
$ 494,000.00
$ 494,000.00
$ 494,000.00
$ 494,000.00
MACRS Depreciation %
20%
32%
19.20%
11.52%
Depreciation = Cost* Dep % =
$ 98,800.00
$ 158,080.00
$ 94,848.00
$ 56,908.80
Tax Saving on depreciation = Depreciation * 35% =
$ 34,580.00
$ 55,328.00
$ 33,196.80
$ 19,918.08
Note-2:
Calculation of Tax Saving on loss on sale of Machine :
Cost of Machine
$ 494,000.00
Less: Accumulated Depreciation
$ (408,636.80)
Book Value
$ 85,363.20
Less: Salve value
$ (59,500.00)
Loss on Sale
$ 25,863.20
Tax Saving = loss on sale * 35% =
$ 9,052.12