Question

Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $412,000 is estimated to result in $152,000 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 $55,200. The press also requires an initial investment in spare parts inventory of $22,000, along with an additional $3,300 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.

Answer 1

Calculation of NPV of the Project
Year	Particulars	Amount	PVF @ 9%	Present Value
0	Initial Investment in machine Press	412000
	Initial Investment in Inventory of Spare Parts for 1st year	22000
		-434000	1	-434000
1	After Tax Annual Cost savings	98800
	Tax Saving on CCA@35%	14420
	Investment in Inventory of Spare Parts for 2nd year	-25300
		87920	0.917431	80660.55
2	After Tax Annual Cost savings	98800
	Tax Saving on CCA@35%	25956
	Investment in Inventory of Spare Parts for 3rd year	-28600
		96156	0.84168	80932.58
3	After Tax Annual Cost savings	98800
	Tax Saving on CCA@35%	20764.8
	Investment in Inventory of Spare Parts for 4 th year	-31900
		87664.8	0.772183	67693.31
4	After Tax Annual Cost savings	98800
	Tax Saving on CCA@35%	16611.84
	Tax Saving on loss @ 35%	47127.36
	Salvage Value*	55200
		217739.2	0.708425	154251.9
	Net Present Value of the Project			-50461.6
	* Since Salvage value is a inflow it has been considered.

	Calculation of CCA @ 20%
	Purchase Cost	412000
Less	CCA @ 20% for half year**	41200
	Closing Balance	370800
	Opening Balance at 2nd year	370800
Less	CCA @ 20%	74160
	Closing Balance	296640
	Opening Balance at 3rd year	296640
Less	CCA @ 20%	59328
	Closing Balance	237312
	Opening Balance at 4th year	237312
Less	CCA @ 20%	47462.4
	Closing Balance	189849.6
	** CCA for the initial year is considered for half year only.
	Calculation of Gain on Machine at 4th year
	Book Value	189849.6
Less	Salvage Value	55200
	Net Loss	134649.6