Question

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $397,000 is estimated to result in $145,000 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 $46.000. The press also requires an initial investment in spare parts inventory of $15,100, along with an additional $2,100 in inventory for each succeeding year of the project. The shop's tax rate is 21 percent and its discount rate is 8 percent. Calculate the project's NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) bed NPV

Answer 1

	Year 1	Year 2	Year 3	Year 4
Cost Savings	145000	145000	145000	145000
Less: Depreciation	397000	0	0	0
Less: Carried Forward Loss	0	252000	107000	0
Add: Salvage Value	0	0	0	46000
Net Profit	-252000	-107000	38000	191000
Less:Tax@21%	0	0	7980	40110
Add:Depreciation	397000	0	0	0
Add: Carried Forward Loss	0	252000	107000	0
Less: Working Capital	2100	2100	2100	2100
Add: Working Capital Refund	0	0	0	8400
Cash Flow	142900	142900	134920	157190

Assumptions:

1) Loss will be carried forward in next year.

2) Salvage Value will be taxable.

3) Working Capital will be refunded at the end of project

Year	Cash Flows	Discounting Factor [1/(1.08^year)]	PV of Incremental Cash Flows (cash flow*discounting factor)
0	-412100	1	-412100
1	142900	0.92592593	132314.8148
2	142900	0.85733882	122513.7174
3	134920	0.79383224	107103.846
4	157190	0.73502985	115539.3426
		NPV= (sum of above)	65371.72076

Year 0 = 397000 + 151000

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