Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $399,000 is estimated to result in $146,000 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 $47,000. The press also requires an initial investment in spare parts inventory of $15,200, along with an additional $2,200 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and its discount rate is 9 percent. Calculate the project's NPV.

Answer 1

NPV = 61,257.50

5-year MACRS depreciation:

Formula Year (n) Asset cost %age depreciation Depreciation (D) 1 | 399000 20.00% 79800 2 | 399000 32.00% 127680 3 | 399000 19.20% 76608 4 | 399000 11.52% 45965 5 | 6 399000 399000 11.52% 5.76% 45965 22982 Asset cost*%age dep.

NPV table:

Formula 1 2 3 4 | 146000 146000 79800127680 131436 141970 2200 2200 s*(1-Tax rate) + (D*Tax rate) Return of total inc. in NWC in year 4 IC - Total depreciation over 4 years Year (n) Initial cost (IC) 399000 Savings (S) Depreciation (D) Operating Cash Flow (OCF) Inc. in NWC 15200 Book value of asset in year 4 (BV)|| Salavge value (SV) After-tax salvage value (ASV) Free Cash Flow (FCF) -414200 Discount factor @ 9% 1.000 PV of FCF -414200.00 61257.50 146000 146000 76608 45965 130734 123992 2200 -21800 68947 470001 51828 128534 197621 0.772 0.708 99251.65 139999.44 SV - Tax rate*(SV-BV) OCF-Inc. in NWC-IC + ASV 1/(1+9%)an FCF*Discount factor Sum of all PVs 129236 0.917 118565.14 139770 0.842 117641.28 NPV