Question

he Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,086,000.00, and it would cost another $32,300.00 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 $553,500.00. The machine would require an increase in net working capital (inventory) of $7,800.00. The sprayer would not change revenues, but it is expected to save the firm $535,450.00 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 36.00%. d. If the project's cost of capital is 16.90%, what is the NPV of the project?

Answer 1

Total Initial Investment = Cost of sprayer + Installation cost + Working capital

= $1,086,000 + $32,300 + $7,800

= $1,126,100

Total Initial Investment is $1,126,100.

Annual Cash flow, terminal year cash flow and NPV of project at 16.90% discount rate is calclated in excel and screen shot provided below:

NPV of project is $160,684.61.

Since, NPV of project is a positive value, so project should be accepted.