CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $140,000 in annual pretax cost savings. The press falls in the MACRS five-year class, 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 $12,000, along with an additional $2,500 in inventory for each succeeding year of the project. If the shop's tax rate is 34% and its discount rate is 12%, should the company buy and install the machine press.
Use MACRS 5-yr class coefficients from year 1 thru year 4, respectively: 0.2, 0.32, 0.192, 0.1152 to calculate depreciation each year. Calculate OCF for each year. Calculate Book Value of the equipment at the end of the project, and calculate aftertax salvage value. Then calculate NPV.