CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2725622 • 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 shops tax rate is 35 percent and its discount rate is 11 percent. Calculate the NPV
Explanation / Answer
Year 1 2 3 4 Annual Savings a $193,000.00 $193,000.00 $193,000.00 $193,000.00 Post Tax Annual Savings b = a*65% $125,450.00 $125,450.00 $125,450.00 $125,450.00 Depreciation Rate c 20.00% 32.00% 19.20% 11.52% Depreciation d = c*494000 $98,800.00 $158,080.00 $94,848.00 $56,908.80 Depreciation Tax Shield e = d*0.35 $34,580.00 $55,328.00 $33,196.80 $19,918.08 Post tax cash inflow f = b+e $160,030.00 $180,778.00 $158,646.80 $145,368.08 Post tax salvage value of machine g - Note 1 $0.00 $0.00 $0.00 $68,552.12 Working Capital Reversal ($21900 + $3900) h $0.00 $0.00 $0.00 $25,800.00 Total Cash Inflows i = f+g+h $160,030.00 $180,778.00 $158,646.80 $239,720.20 PV Factor @ 11% j 0.9009 0.8116 0.7312 0.6587 Present Value of Cash inflows k=i*j $144,171.17 $146,723.48 $116,001.17 $157,911.12 Present Value of Cash Inflows $564,806.95 Less: Initial Outflow ($494000 + $25800) $519,800.00 NPV $45,006.95 Note 1 Purchase Price $494,000.00 Less: Accumulated Depreciation $408,636.80 Book Value (a) $85,363.20 Expected Salvage value (b) $59,500.00 Loss (c = a-b) $25,863.20 Tax Shield on Loss (d = c*0.35) $9,052.12 Post tax salvage value of machine (b+d) $68,552.12