Question

Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $430,000 is estimated to result in $170,000 in annual pre-tax cost savings. The press falls into Class 8 for CCA purposes (CCA rate of 20% per year), and it will have a salvage value at the end of the project of $57,000. The press also requires an initial investment in spare parts inventory of $40,000, along with an additional $5,100 in inventory for each succeeding year of the project. If the shop’s tax rate is 35% and its discount rate is 9%.

Calculate the NPV of this project. (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

NPV           $

Should the company buy and install the machine press?

• Yes

• No

Answer 1

Depreciation Schedule
Year	Opening Balance	Depreciation	Closing Balance
A	B	C = B*20%	D = B-C
1	430000	86000	344000
2	344000	68800	275200
3	275200	55040	220160
4	220160	44032	176128

Calculation of NPV of the Project
Particulars	0	1	2	3	4
Initial Investment
Cost of Equipment (A)	-430000
Operating Cash Flows
Annual Pre tax cost savigs (B)		170000	170000	170000	170000
Depreciation (C )		86000	68800	55040	44032
Profit Before Tax (D = B-C)		84000	101200	114960	125968
Tax @35% (E = D*35%)		29400	35420	40236	44088.8
Profit After Tax (F = D-E)		54600	65780	74724	81879.2
Add back Depreciation (G = C)		86000	68800	55040	44032
Net Operating Cash flows (H = F+G)		140600	134580	129764	125911.2
Working Capital Investment
Net Working Capital (I)	-40000	-5100	-5100	-5100	55300
Terminal Value
Salvage Value (J)					57000
Unclaimed CCA (K)					176128
Loss on sale (L = J-K)					-119128
Tax @35% (M = L*35%)					-41694.8
After tax loss (N = L-M)					-77433.2
Add back unclaimed CCA (O = K)					176128
Net Salvage Value (P = N+O)					98694.8
Total Cash Flows (Q = A+H+I+P)	-470000	135500	129480	124664	279906
Discount Factor @9% (R) 1/(1+9%)^n n=0,1,2,3,4	1	0.917431193	0.841679993	0.77218348	0.708425
Discounted Cash Flows (V = T*U)	-470000	124311.9266	108980.7255	96263.48136	198292.5
NPV of the Project	57848.60062
Therefore, NPV of the Project is $57,848.60
Company should buy and install the machine press since the NPV is positive