Question

New-Project Analysis

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 $19,000 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 $628,000. The machine would require an increase in net working capital (inventory) of $13,500. The sprayer would not change revenues, but it is expected to save the firm $474,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

1. What is the Year-0 net cash flow?

   $  

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

   Year 1:	$
   Year 2:	$
   Year 3:	$

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

   $  

4. If the project's cost of capital is 11 %, what is the NPV of the project?

   $  

   Should the machine be purchased?

   -Select-YesNo

Answer 1

On calculating the initial investments, depriciation costs and after tax salvage values, we get the following -

a. Year 0 net cash flow = -$1032500

b. Year 1 Operating cashflow = $420253.08

Year 2 Operating cashflow = $465578.2

Year 3 Operating cashflow = $344765.56

c. Additional 3 year cashflow = $420503.16

d. NPV = $283537.9823

Yes, the machine should be purchased.

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