CSM Machine Shop is considering a four-year project to improve its production ef
ID: 2758477 • Letter: C
Question
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $500,000 is estimated to result in $199,000 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 $62,500. The press also requires an initial investment in spare parts inventory of $22,500, along with an additional $4,500 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 12 percent
Calculate the NPV
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $500,000 is estimated to result in $199,000 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 $62,500. The press also requires an initial investment in spare parts inventory of $22,500, along with an additional $4,500 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 12 percent
Explanation / Answer
Year CF before Tax Tax Rate Cash Flow Discounting Rate Net Present Value 0 527000 0 527000 1 -527000 1 199000 30% 139300 0.892857143 124375 2 199000 30% 139300 0.797193878 111049.1071 3 199000 30% 139300 0.711780248 99150.98852 4 199000 30% 139300 0.635518078 88527.66832 4 89000 0% 66500 0.635518078 42261.95221 Net Present Value -61635.2838