Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,100,000, and it would cost another $17,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $565,000. The machine would require an increase in net working capital (inventory) of $15,000. The sprayer would not change revenues, but it is expected to save the firm $481,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

1. What is the Year 0 net cash flow?
   $
2. 
   
3. 
   
4. 
   
5. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Year 1	$
   Year 2	$
   Year 3	$

6. 
   
7. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 15 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
    $
    
    Should the machine be purchased?
    -Select-YesNo

Answer 1

Time line		0	1	2	3
Cost of new machine		-1117500
Initial working capital		-15000
=Initial Investment outlay		-1132500
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			481000	481000	481000
-Depreciation	=Cost of machine*MACR%		-372462.75	-496728.8	-165501.8	82806.75	=Salvage Value
=Pretax cash flows			108537.25	-15728.75	315498.25
-taxes	=(Pretax cash flows)*(1-tax)		70549.2125	-10223.69	205073.86
+Depreciation			372462.75	496728.75	165501.75
=after tax operating cash flow			443012	486505	370576
reversal of working capital					15000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				367250
+Tax shield on salvage book value	=Salvage value * tax rate				28982.363	additional cash flow=	367250+28982=396232
=Terminal year after tax cash flows					411232.36
Total Cash flow for the period		-1132500	443011.9625	486505.06	781807.98
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875
Discounted CF=	Cashflow/discount factor	-1132500	385227.7935	367867.72	514051.43
NPV=	Sum of discounted CF=	134647

purchase as NPV is positive