Question

Problem 9-21 Cost-Cutting Proposals [LO 2]

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $491,000 is estimated to result in $190,000 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 $58,000. The press also requires an initial investment in spare parts inventory of $21,600, along with an additional $3,600 in inventory for each succeeding year of the project. The shop’s tax rate is 40 percent and its discount rate is 10 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

Time line		0	1	2	3	4
Cost of new machine		-491000
Initial working capital		-21600
=Initial Investment outlay		-512600
5 years MACR rate			20.00%	32.00%	19.20%	11.52%	17.28%
Profits			190000	190000	190000	190000
-Depreciation	=Cost of machine*MACR%		-98200	-157120	-94272	-56563.2	84844.8	=Salvage Value
-working capital to be maintained			-3600	-3600	-3600	-3600
=Pretax cash flows			88200	29280	92128	129836.8
-taxes	=(Pretax cash flows)*(1-tax)		52920	17568	55276.8	77902.08
+Depreciation			98200	157120	94272	56563.2
=after tax operating cash flow			151120	174688	149548.8	134465.28
reversal of working capital						36000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					34800
+Tax shield on salvage book value	=Salvage value * tax rate					33937.92
=Terminal year after tax cash flows						104737.92
Total Cash flow for the period		-512600	151120.00	174688.0000	149548.80	239203.2
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641
Discounted CF=	Cashflow/discount factor	-512600	137381.8182	144370.2479	112358.2269	163379
NPV=	Sum of discounted CF=	44889.30