Question

Problem 11-06 New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $18,500 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 $547,000. The machine would require an increase in net working capital (inventory) of $10,500. The sprayer would not change revenues, but it is expected to save the firm $391,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

What is the Year 0 net cash flow? $

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$

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. $

If the project's cost of capital is 12 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-1000000-18500-10500
-1029000	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	391,000	391,000	391,000
Less: Depreciation	339,466	452,723	150,840
Net Savings	51,534	-61,723	240,160
Less: Tax @30%	15,460.19	-18,516.98	72,048.05
Income after Tax	36,073.77	-43,206.28	168,112.11
Add: Depreciation	339,466	452,723	150,840
Net Operating Cash Flow	375,539.82	409,516.98	318,951.96
Add: After tax salvage value			405,541.26
Recovery of Working capital			10,500
Additional Cash flow			416,041
Cash Flow	375,539.82	409,516.98	734,993.21
Written down value	75,471
Sale price	547000
Gain on sale	471,529
Tax	141458.745
After tax salvage value	405541.255
c.NPV = Present value of cash inflows – present value of cash outflows
= 375539.82*PVF(12%, 1 year) + 409516.98*PVF(12%, 2 years) + 734993.21*PVF(12%, 3 years) – 1029000
155921.4806