Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $810,000, 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 $638,000. The machine would require an increase in net working capital (inventory) of $16,000. The sprayer would not change revenues, but it is expected to save the firm $391,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

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.
$

If 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.
$  

Answer 1

Value of initial investment in fixed assets = $810,000 + $20,000

= $830,000

Book Value of equipment at end of year 3 = $830,000 × 7.41%

= $61,503.

Sale price = $638,000

After tax salvage value = $61,503 + ($638,000 - $61,503) × (1 - 35%)

= $61,503 + $374,723

= $436,226

After tax salvage value is $436,226.

Additional Year 3 cash flow = After tax salvage value + return of working capital

= $436,226 + $16,000

= $452,226.

Additional Year 3 cash flow is $452,226.

Annual cash flow and NPV of project at 11% discount rate is calculated in excel and screen shot provided below:

NPV of project is $329,223.05.