Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $421,000 is estimated to result in $157,000 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 $16,300, along with an additional $3,300 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

4 after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $58,000.00 $72,748.80 -$14,748.80 less: $157,000.00 $84,200.00 $72,800.00 $16,744.00 $56,056.00 $84,200.00 $140,256.00 $157,000.00 $134,720.00 $22,280.00 $5,124.40 $17,155.60 $134,720.00 $151,875.60 $157,000.00 $80,832.00 $76,168.00 $17,518.64 $58,649.36 $80,832.00 $139,481.36 $157,000.00 $48,499.20 $108,500.80 $24,955.18 $83,545.62 $48,499.20 $132,044.82 add: salvage value less: tax on gain after tax salvage value $58,000.00 -$3,392.22 $61,392.22 YEAR Pretax cost savings depreciation EBT tax @23% EAT depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 10% PRESENT VALUE -$421,000.00 -$16,300.00 - $3,300.00 $3,300.00 $3,300.00 $26,200.00 -$437,300.00 1 -$437,300.00 $62,325.33 $136,956.00 0.9091 $124,505.45 $148,575.60 0.8264 $122,789.75 $136,181.36 0.7513 $102,315.07 $61,392.22 $219,637.04 0.6830 $150,015.05 NPV