Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,040,000, and it would cost another $20,500 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 $663,000. The machine would require an increase in net working capital (inventory) of $9,000. The sprayer would not change revenues, but it is expected to save the firm $440,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

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

b.) What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

c.) What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.

d.)f the project's cost of capital is 11 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

Should the machine be purchased? (Yes/ No) ... (Please make sure to answer d. Thank you!)

Answer 1

Question a:
Calculation of Year 0 net cash flow
Particulars	Year 0
Sprayer' Base Price	-1040000
Installation Cost	-20500
Investment in working capital	-9000
Net Cash Flow	-1069500
Therefore, Year 0 net cash flow is -$1,069,500
Question b:
Calculation of Net Operating Cash Flows
Particulars	Year 1	Year 2	Year 3
Saving operating costs (A)	440000	440000	440000
Less: Depreciation (B) Year 1: $1,060,500 *33.33% Year 2: $1,060,500 *44.45% Year 3: $1,060,500 *14.81%	353464.65	471392.25	157060.05
Profit Before Tax (C = A-B)	86535.35	-31392.25	282939.95
Less: Tax @30% (D = C*30%)	25960.605	-9417.675	84881.985
Profit After Tax (E = C-D)	60574.745	-21974.58	198057.97
Add back Depreciation (F = B)	353464.65	471392.25	157060.05
Net Operating Cash Flows (G = E+F)	414039.4	449417.68	355118.02
Net Operating Cash Flow in Year 1 is $414,039.40
Net Operating Cash Flow in Year 2 is $449,417.68
Net Operating Cash Flow in Year 3 is $355,118.02
Question c:
Calculation of Additional Cash Flow in Year 3
Particulars	Year 3
Sale value of Machine (A)	663000
Less: Book value of Machine (B) ($1,060,500 *7.41%)	78583.05
Profit on sale (C = A-B)	584416.95
Less: Tax @30% (D = C*30%)	175325.09
After tax sale value of Machine (E = A-D)	487674.92
Recovery of Net working capital	9000
Additional cash flow	496674.92
Additional Cash Flow in Year 3 is $496,674.92

Totl Cash Flow in Year 3 = Operating Cash flow in year 3 + additional cash flow in year 3 = $355,118.02 + $496,674.92 = $851,792.93

Question d:
Calculation of NPV of the Project
Year	Cash Flows	Discount Factor@11%	Discounted Cash Flows
A	B	C = 1/(1+11%)^n	D = B*C
0	-1069500	1	-1069500
1	414039.395	0.900900901	373008.464
2	449417.675	0.811622433	364757.4669
3	851792.93	0.731191381	622823.6491
NPV of the Project	291089.58
NPV of the Project is $292,089.58
Yes, Machine Should be Purchased because NPV of the Project is positive