Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $920,000, and it would cost another $19,000 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 $630,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $416,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

1. What is the Year 0 net cash flow?
   $
2. 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	$

3. 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.
   $
4. If the project's cost of capital is 10 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
   
   Should the machine be purchased?
   y/n

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital

= 920,000+19,000 +18,000

= -$957,000 since outflow

b.Annual Cash Flows:

	Year 1	2	3
Savings in Cost	416,000	416,000	416,000
Less: Depreciation	312,969	417,386	139,066
Net Savings	103,031	-1,386	276,934
Less: Tax @30%	30,909.39	-415.65	83,080.23
Income after Tax	72,121.91	-969.85	193,853.87
Add: Depreciation	312,969	417,386	139,066
Cash Flow	385,090.61	416,415.65	332,919.77
Add: After tax salvage value			461,873.97
Recovery of Working capital			18,000
Cash Flow	385,090.61	416,415.65	812,794

Note: Written down value of machine = 939,000*7.41% = $69,579.9

Sale Price = $630,000

Gain on Sale = $560,420.1

Tax on Gain = $168,126.03

After tax salvage value = 630,000– 168,126.03= $461,873.97

c.NPV = Present value of cash inflows – present value of cash outflows

= 385,090.61*PVF(10%, 1 year) + 416,415.65*PVF(10%, 2 years) + 812,794*PVF(10%, 3 years) – 957,000

= 385,090.61*0.909 + 416,415.65*0.826+ 812,794*0.751 – 957,000

= $347,414.99

yes, should be purchased (since NPV is positive)