Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $950,000, and it would cost another $23,000 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 $637,000. The machine would require an increase in net working capital (inventory) of $19,000. The sprayer would not change revenues, but it is expected to save the firm $410,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

1. What is the Year 0 net cash flow?
   $
2. 
   
3. 
   
4. 
   
5. 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.

   Year 1	$
   Year 2	$
   Year 3	$

6. 
   
7. 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.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 15 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
    $
    
    Should the machine be purchased?
    -Select-Yes No

Answer 1

a. Year 0 net cash flow : $ 992,000

Year 0 net cash flow = Installed cost of sprayer + Increase in working capital = $ ( 950,000 + 23,000) + $ 19,000 = $ 992,000

e. Net Operating Cash Flows :

	Net Operating Cash Flows
Year 1	$ 380,005
Year 2	$ 417,874
Year 3	$ 316,935

Net Operating Cash Flows = Annual Savings x ( 1 - t ) + Annual depreciation x t.

g. Additional Year 3 cash flow : $ 458,285

Book value of the sprayer after 3 years = $ 973,000 x 7.41 % = $ 72,099.30

Gain on salvage = $ 637,000 - $ 72,099 = $ 564,901

Tax effect of gain on salvage = $ 564,901 x 0.35 = $ 197,715

After tax cash flows from salvage = $ 637,000 - $ 197,715 = $ 439,285.

Additional cash flows in Year 3 = $ 439,285 + $ 19,000 = $ 458,285

k. NPV : $ 164,114

Year	Cash Flows	PV factor at 15 %	Present Values
0	$ ( 992,000)	1.0000	$ ( 992,000 )
1	380,005	0.8696	330,452.35
2	417,874	0.7561	315,954.53
3	775,220	0.6575	509,707.15
			$ 164,114.03

Yes.