Question

Carlton Co. is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,110,000, and it would cost another $23,500 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 $654,000. The machine would require an increase in net working capital (inventory) of $9,000. The sprayer would not change revenues, but it is expected to save the firm $390,000 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. 
   
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 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?
    -Select-Yes/No

Answer 1

a.Initial Investment Outlay i.e. Year 0 cash flow= Base Price + Modification cost + Increase in Working Capital

= 1,110,000+23,500 +9,000

= -$1,142,500 since outflow

b.Annual Cash Flows:

	Year 1	2	3
Savings in Cost	390,000	390,000	390,000
Less: Depreciation	377,796	503,841	167,871
Net Savings	12,204	-113,841	222,129
Less: Tax @30%	3,661.34	-34,152.23	66,638.60
Income after Tax	8,543.12	-79,688.53	155,490.06
Add: Depreciation	377,796	503,841	167,871
Cash Flow	386,338.67	424,152.23	323,361.41
Add: After tax salvage value			482,997.70
Recovery of Working capital			9,000
Cash Flow	386,338.67	424,152.23	815,359

Note: Written down value of machine = 1,133,500*7.41% = $83,992.35

Sale Price = $654,000

Gain on Sale = $570,007.65

Tax on Gain = $171,002.30

After tax salvage value = 654,000– 171,002.30= $482,997.7

Operating cash flows:

Year 1	$386,338.67
Year 2	$424,152.23
Year 3	$323,361.41

Additional cash flow = $491,997.7

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

= 386,338.67*PVF(10%, 1 year) + 424,152.23*PVF(10%, 2 years) + 815,359*PVF(10%, 3 years) – 1,142,500

= 386,338.67*0.909 + 424,152.23*0.826+ 815,359*0.751 – 1,142,500

= $168,275.49

Yes