In: Finance
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?
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) |