Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $930,000, and it would cost another $23,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $491,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change revenues, but it is expected to save the firm $354,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) 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 13%, what is the NPV of the project?

   $   

   Should the machine be purchased?

   -Select-YesNoItem 7

Answer 1

a]

year 0 net cash flow = -(total cost of sprayer + investment in NWC)

total cost of sprayer = base price + installation cost

year 0 net cash flow = -$966,500

b]

Net operating cash flows are calculated in the table below

Operating cash flow (FCF) each year = incremental income after tax + depreciation

c]

Additional cash flow = after-tax salvage value + recovery of NWC

Profit on sale of equipment at end of year 3 = sale price - book value

book value = original cost - accumulated depreciation

after-tax salvage value = salvage value - tax on profit on sale of equipment   

Additional cash flow = $398,914

d]

NPV is calculated using NPV function in Excel

NPV is $114,611

yes, the machine should be purchased as the NPV is positive