Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $850,000, and it would cost another $21,500 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 $532,000. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change revenues, but it is expected to save the firm $410,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

A. What is the Year 0 net cash flow?

$ 815500

B. 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 $

C. 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.

$

D. If the project's cost of capital is 13 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

Should the machine be purchased?

Answer 1

Based on the given data, pls find below steps, workings and answers:

A) Year 0 Net Cash flow = Cash OUT flow of $ 884500;

B) Net Operating Cash Flows for Years 1 2 and 3 are $ 368165, $ 402084 and $ 311674, respectively.

C) Additional Year 3 Cash flow is $ 381402

D) NPV of the Project is $ 236537; Since this Project is having postive NPV, 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;