Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $411,000 is estimated to result in $152,000 in annual pretax cost savings. The press is eligible for 100 percent bonus depreciation and it will have a salvage value at the end of the project of $53,000. The press also requires an initial investment in spare parts inventory of $15,800, along with an additional $2,800 in inventory for each succeeding year of the project. The shop’s tax rate is 23 percent and its discount rate is 10 percent. Calculate the project's NPV.

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation - change in working capital

In year 4, the entire working capital investment is recovered, and hence the change in working capital is negative

profit on sale of machine at end of year 4 = sale price - book value

book value = zero (since the machine is fully depreciated in first year)

after-tax salvage value = salvage value - tax on profit on sale of machine.

NPV is calculated using NPV function in Excel

NPV is $67,577