Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $830,000, 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 $630,000. 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 $457,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. What is the Year-0 net cash flow? $ What are the net operating cash flows in Years 1, 2, and 3? 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)? Round your answer to the nearest dollar. $ If the project's cost of capital is 11 %, what is the NPV of the project? Round your answer to the nearest dollar. $ Should the machine be purchased?

Answer 1

Year	0	1	2	3
Sprayer's Cost	(830,000)
Cost of Installation	(17,500)
Working capital requirement	(14,500)
Savings		457,000	457,000	457,000
Depreciation		(282,472)	(376,714)	(125,515)
Savings after depreciation		174,528	80,286	331,485
Tax expense @ 40%		(69,811)	(32,115)	(132,594)
Net savings		104,717	48,172	198,891
Add: depreciation		282,472	376,714	125,515
Release of working capital				14,500
Proceeds from sale (after tax)				378,000
Net cash inflow/(outflow)	(862,000)	387,189	424,886	716,906
PVF @ 11%	1.00	0.90	0.81	0.73
Present Value	(862,000)	348,819	344,847	524,195

(a)	Year 0 net cash outflow	(862,000)
(b)	Net operating cash flows
	Year 1	387,189
	Year 2	424,886
	Year 3	716,906
(c )	Additional Year 3 cahs inflow	392,500
(d)	NPV of the project	355,861
(e )	Yes, the machine should be purchased as it has positive NPV.