Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $930,000, and it would cost another $24,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $620,000. 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 $14,500. The sprayer would not change revenues, but it is expected to save the firm $392,000 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.

1. What is the Year-0 net cash flow?

   $  

2. What are the net operating cash flows in Years 1, 2, and 3?

   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)?

   $  

4. If the project's cost of capital is 11%, what is the NPV of the project?

   $  

Answer 1

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

= 930,000+24,000 +14,500

= -$968,500 since outflow

	Year 1	2	3
Savings in Cost	392,000	392,000	392,000
Less: Depreciation	317,968	424,053	141,287
Net Savings	74,032	-32,053	250,713
Less: Tax @25%	18,507.95	-8,013.25	62,678.15
Income after Tax	55,523.85	-24,039.75	188,034.45
Add: Depreciation	317,968	424,053	141,287
Net Operating Cash flow	373,492.05	400,013.25	329,321.85
Add: After tax salvage value			482,672.85
Recovery of Working capital			14,500
Additional Year 3 cash flow			497,173
Total cash flow	373,492.05	400,013.25	826,494.70

Written down value	70,691
Sales Price	620000
Gain on Sale	549,309
Less: Tax	137327.15
After tax salvage value	482672.85

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

= 373492*PVF(11%, 1 year) + 400,013*PVF(11%, 2 years) + 826495*PVF(11%, 3 years) – 968,500

= 373492*0.901 + 400,013*0.812+ 826495*0.731 – 968500

= $296,995