In: Finance
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $940,000, and it would cost another $19,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $591,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $20,000. The sprayer would not change revenues, but it is expected to save the firm $381,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.
What is the Year-0 net cash flow?
$
What are the net operating cash flows in Years 1, 2, and 3?
Year 1: | $ |
Year 2: | $ |
Year 3: | $ |
What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)?
$
If the project's cost of capital is 10%, what is the NPV of the project?
$
Should the machine be purchased?
-Select-YesNo
Based on the given data, pls find below steps, workings and answers:
a) What is the Year-0 net cash flow ? Year 0 Cash Flow is $ 979500 ( Capital Investment plus Working Capital)
b) Net Operating Cash Flows for year 1 , 2 and 3 are $ 365700, $ 392374 and $ 321275, respectively;
c) Additional Year 3 Cash Flow = $ 481025
d) NPV of this Project is 280011; since the NPV is positive, the machine can be purchased.
Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;
Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;
The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;