Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $405,000 is estimated to result in $149,000 in annual pretax cost savings. The press is eligible for 100 percent bonus depreciation and it will have a salvage value at the end of the project of $50,000. The press also requires an initial investment in spare parts inventory of $15,500, along with an additional $2,500 in inventory for each succeeding year of the project. The shop's tax rate is 25 percent and its discount rate is 12 percent. Calculate the project's NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV

Answer 1

Tax rate		25%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4		Total
Cost		$           405,000	$          405,000	$           405,000	$           405,000
Dep Rate		100.00%
Depreciation		$           405,000	$                     -	$                      -	$                      -		$           405,000
Calculation of after-tax salvage value
Cost of machine			$          405,000
Depreciation			$          405,000
WDV			$                     -
Sale price			$             50,000
Profit/(Loss)			$             50,000
Tax			$             12,500
Sale price after-tax			$             37,500
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4
Pre-tax cost saving		$           149,000	$          149,000	$           149,000	$           149,000
Less: Depreciation		$           405,000	$                     -	$                      -	$                      -
Profit before tax		$         (256,000)	$          149,000	$           149,000	$           149,000
Tax@25%		$            (64,000)	$             37,250	$             37,250	$             37,250
Profit After Tax		$         (192,000)	$          111,750	$           111,750	$           111,750
Add Depreciation		$           405,000	$                     -	$                      -	$                      -
Cash Profit after-tax		$           213,000	$          111,750	$           111,750	$           111,750
Calculation of NPV
						12.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor	Present values
0		$          (405,000)	$           (15,500)		$          (420,500)	1.0000	$    (420,500.00)
1			$             (2,500)	$           213,000	$           210,500	0.8929	$     187,946.43
2			$             (2,500)	$           111,750	$           109,250	0.7972	$        87,093.43
3			$             (2,500)	$           111,750	$           109,250	0.7118	$        77,761.99
4		$             37,500	$             23,000	$           111,750	$           172,250	0.6355	$     109,467.99
					Net Present Value		$       41,769.84