Question

Chapter 9 Questions and Problems a Saved Help Sav o You skipped this question in the previous attempt. 11.12 points CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $415,000 is estimated to result in $154,000 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 $55,000. The press also requires an initial investment in spare parts inventory of $16,000, along with an additional $3,000 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.) Skipped eBook Print Net present value References

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $415,000 is estimated to result in $154,000 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 $55,000. The press also requires an initial investment in spare parts inventory of $16,000, along with an additional $3,000 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

Given,

cost of machine = $ 415000

Annual pretax cost savings = $ 154000

Salvage value = $ 55000

Initial investment in inventory = $ 16000

Annual Net working capital = $ 3000

Total net working capital = $ 16000 + (3000 x 4)

= $ 16000 + $ 12000 = $ 28000

Tax rate = 25% or 0.25

Discount rate = 12%

Solution :-

Step 1+ Calaulate Depreciation DE BXC mpcRS Tates ost of machine Depaeciation Years 83000 1 0.20 415000 133800 O.32 41s000 79680 415000 0.192 47808 415000 0.1152 To tal $343288 Step 2 Calculate Alte tax Salvage Valuet at the end Look Value of machine at the Praject Cost of ma chine- Depreciahon #343 288 $7172 415000 t Can be Sold only fer $55o00 But is a loss, is Creates q tex refend S thcec

Nows After dax Salvage Value $S5000 +(71712-SSO00) 0.35 $S5000 +$16712025 59178 $S5000 +54178 tep 3 (alulate depar cicchon tax Shield DE BXC 14 Depaeciaton tax Shield Depertuiation Tax Yaur 20150 1 0.25 83000 133 800 33300 0.25 19920 O.25 79680 3 h808 1952 O.35

Step 4+ Calauation of Cash Plolos Annual after tax lost Saungs 1s4000 (-dex aate) 2 154000(1-0.25) $115500 $154000 (0.75 E-B+C-D D Years Atertax Depreciahom Annual Operutne Cash Plolus ost Savings tay Shield NwC 1 2050 133350 11Ss00 3000 )45700 33200 2 11SS00 3 000 । 3२५२० 19920 11SS00 3 3000 Operating Cash flowder Ya y haulol be Atter tax lost Sauings+ Repreciahbn dar Shieb Annual NwC + Aftea ten Salvage Value +Retovery of NC

Operating Cash flow der Year y 11s500 + 11952 3000 t59128 + 28000 $211630 Sdep st fresent Valur (P of Operating Cash flouos D= BxC Years Opetating Py tactor Pv ot operating ash Plows Cansh flows 218973.19525 233350 10.892857 O.797194 116151.1658 245700 1334so 0.711780 94375.261 311630 o. 635518 1344 94.67434 $463894.30 Step 6 Calaulete NPU Inital lnvestment F431000 $415000 +I6000

NPV= PV of Operating ConSh Plows nitial Investhoent $463 894.30 $431000 2$33 894.30