Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $960,000, and it would cost another $25,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $574,000. 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 $12,000. The sprayer would not change revenues, but it is expected to save the firm $320,000 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.

What is the Year-0 net cash flow?

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

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

If the project's cost of capital is 14%, what is the NPV of the project?

Should the machine be purchased?

Answer 1

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

In year 3, the entire working capital investment is recovered.

profit on sale of sprayer  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 sprayer

NPV is calculated using NPV function in Excel

NPV is $52,019

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