Question

11.6. New-Project Analysis:
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,043,000.00, and it would cost another $30,200.00 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 $576,500.00. The machine would require an increase in net working capital (inventory) of $7,000.00. The sprayer would not change revenues, but it is expected to save the firm $553,450.00 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 37.00%.

d. If the project's cost of capital is 13.75%, what is the NPV of the project?

Answer 1

Year 0 net cash flow = - $1,043,000 - $30,200 - $7,000

Year 0 net cash flow = - $1,080,200

Year 1

$553,450*(1-37%) + ($1,043,000+$30,200)*0.3333*37%

Net operating cash flows in Years 1 = $481,021.60

Year 2

$553,450*(1-37%) + ($1,043,000+$30,200)*0.4445*37%

Net operating cash flows in Years 2 = $525,177.34

Year 3

$553,450*(1-37%) + ($1,043,000+$30,200)*0.1481*37%

Net operating cash flows in Years 3 = $407,481.64

Additional Year-3 cash flow

$576,500 - ($576,500 - ($1,043,000+$30,200)*(1-0.3333-0.4445-0.1481))*37% + $7,000

Additional Year-3 cash flow = $399,618.92

NPV = Year 0 net cash flow + Net operating cash flows in Years 1 /1.12 + Net operating cash flows in Years 2/1.12^2 + Net operating cash flows in Years 3/1.12^3 + Additional Year-3 cash flow/1.12^3

NPV = - $1,080,200 + $481,021.60/1.1375 + $525,177.34/1.1375^2 + $407,481.64/1.1375^3 + $399,618.92/1.1375^3

NPV = $296,930.97

Since NPV is positive, therefore the machine should be purchased,