Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $401,000 is estimated to result in $147,000 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 $48,000. The press also requires an initial investment in spare parts inventory of $15,300, along with an additional $2,300 in inventory for each succeeding year of the project. The shop's tax rate is 23 percent and its discount rate is 10 percent. Calculate the project's NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value

Answer 1

Following is the calculation of depreciation on machine: Calculation of depreciation (MARCS) Year 1 Rate 20.00% 32.00% 1 9.20% 11.52% $ $ $ $ Depreciation ($401,000 rate) (80,200.00) (128,320.00) (76,992.00) (46,195.20) 3 4 Total depreciation $ (331,707.20) Following is the calculation of after-tax salvage vale of machine: Calculation of after-tax salvage value of asset No. Particulars Amount A. Asset cost 401.000.00 B Total depreciation charged $ 331,707.20 C Value of asset at the time of sale (A-B) 69.292.80 D Sale value of machine 48.000.00 E Profit/(loss) on sale (D-C) (21.292.80) F Tax @ 23% (E*0.23) (4.897.34) G After-tax salvage value of asset (D-F) S 5 2,897.3440

Calculate NPV of the project as follows: D Year 2 E Year 3 Year 1 Year 4 Year 0 ($401,000) A Particulars 2 Cost of new machine 3 Cost reduced 4 Depreciation Expense 5 Earning Before Tax A3+A4) 6 Tax rate 7 Total tax (23%A5) 8 Earning After Tax (A5-A7) 9 Depreciation 10 Working capital 11 After-tax Salvage value of machine 12 Cash flow 13 14 Present value factor (1/(1.10) year) Present value of cash flows (PV 15 factor * cash flows) $147,000 (80,200.00) $ $66,800.00 2396 $15,364.00 $51,436.00 80,200.00 $ (2,300.00) $ $147,000 (128,320.00) $ $18,680.00 23% $4,296.40 $14,383.60 128,320.00 $ (2,300.00) S $147.000 (76,992.00) $ $70,008.00 2396 $16.101 84 $53,906.16 76.992.00 S (2.300.00 $ $ $128,598.16 $147 000 (46,195.20) $100,804,80 23% $23,185.10 $77,619.70 46.195.20 22.200.00 52.897.34 | $198.912.24 ($15,300 $ (8416,300) $129,336.00 $140,403.60 0.909090909 0 .8264462811 0.751314801 0.683013455 (S416,300 $117.578.18181818200 $116,036.03305785100 S96,617.70097670920 $135,859.73635680600 NPV (SUM OF PRESENT VALUE 17 OF CASH FLOWS) S49.791.65220954850 Thus, NPV of the project is $49,791.65.