Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $497,000 is estimated to result in $196,000 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 $61,000. The press also requires an initial investment in spare parts inventory of $22,200, along with an additional $4,200 in inventory for each succeeding year of the project. The shop’s tax rate is 34 percent and its discount rate is 12 percent. Calculate the NPV.

(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Net present value $:

Answer 1

Calculation of NPV of the project
Year	0	1	2	3	4	NPV
Investment in new press machine	-$497,000.00
Investment in spares parts inventory	-$22,200.00	-$4,200.00	-$4,200.00	-$4,200.00
Pretax cost savings		$196,000.00	$196,000.00	$196,000.00	$196,000.00
Tax @ 34% on cost savings		-$66,640.00	-$66,640.00	-$66,640.00	-$66,640.00
Depreciation Tax shield		$33,796.00	$54,073.60	$32,444.16	$19,466.50
After tax salvage value					$69,459.74
Net Cash flow	-$519,200.00	$158,956.00	$179,233.60	$157,604.16	$218,286.24
Discount factor @ 12%	1	0.892857143	0.797193878	0.71178025	0.63551808
Present Values	-$519,200.00	$141,925.00	$142,883.93	$112,179.53	$138,724.85	$16,513.31
NPV of the project	$16,513.31
Calculation of depreciation tax shield (MACRS 5 Year Class property)
Year	Cost of machine	Depreciation rate	Depreciation	Tax shield @ 34%
1	$497,000.00	20%	$99,400.00	$33,796.00
2	$497,000.00	32%	$159,040.00	$54,073.60
3	$497,000.00	19.20%	$95,424.00	$32,444.16
4	$497,000.00	11.52%	$57,254.40	$19,466.50
Accumulated Depreciation at the end of 4th Year			$411,118.40
Calculation of after tax salvage value of machine
Cost of machine	$497,000.00
Less : Accumulated depreciation	$411,118.40
Book value of machine at the end of 4th year	$85,881.60
Less : Salvage value	$61,000.00
Loss on sale	$24,881.60
Tax shield on loss on sale @ 34%	$8,459.74
After tax salvage value (Salvage value + Tax shield)	$69,459.74