Question

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 $17,500 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 $597,000. The machine would require an increase in net working capital (inventory) of $11,500. The sprayer would not change revenues, but it is expected to save the firm $356,000 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.
    $

Answer 1

Time line		0	1	2	3
Cost of new machine		-1017500
Initial working capital		-11500
=a. Initial Investment outlay		-1029000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			356000	356000	356000
-Depreciation	=Cost of machine*MACR%		-339132.75	-452278.75	-150691.75	75396.75	=Salvage Value
=Pretax cash flows			16867.25	-96278.75	205308.25
-taxes	=(Pretax cash flows)*(1-tax)		11807.075	-67395.125	143715.775
+Depreciation			339132.75	452278.75	150691.75
=b. after tax operating cash flow			350940	384884	294408
reversal of working capital					11500
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				417900
+Tax shield on salvage book value	=Salvage value * tax rate				22619.025
=c. Terminal year after tax cash flows					452019
Total Cash flow for the period		-1029000	350940	384884	746427
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331
Discounted CF=	Cashflow/discount factor	-1029000	319036.3636	318085.9504	560801.6529
d. NPV=	Sum of discounted CF=	168924.00