Question

In: Finance

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's...

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $980,000, and it would cost another $20,000 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 $560,000. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $481,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

a) What is the Year-0 net cash flow?

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

c) What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?

d) If the project's cost of capital is 12 %, what is the NPV of the project?

Solutions

Expert Solution

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-980,000-20,000-15500
                            (1,015,500) since outflow
b.Annual Cash Flows:
Year 1 2 3
Savings in Cost 481,000 481,000 481,000
Less: Depreciation 333,300 444,500 148,100
Net Savings 147,700 36,500 332,900
Less: Tax @30% 44,310.00 10,950.00 99,870.00
Income after Tax 103,390.00 25,550.00 233,030.00
Add: Depreciation 333,300 444,500 148,100
Operating Cash Flow 436,690.00 470,050.00 381,130.00
Add: After tax salvage value 414,230.00
Recovery of Working capital 15,500
Additional cash flows 429,730
Total Cash Flow 436,690.00 470,050.00 810,860.00
Written down value 74,100
Sale price 560000
Gain on sale 485,900
Tax 145770
After tax salvage value 414230
c.NPV = Present value of cash inflows – present value of cash outflows
= 436,690*PVF(12%, 1 year) + 470,050*PVF(12%, 2 years) + 810,860*PVF(12%, 3 years) – 1,015,500
326276.8996
Yes, should be purchased (since NPV is positive)

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