Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $860,000, and it would cost another $18,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $514,000. 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 $15,500. The sprayer would not change revenues, but it is expected to save the firm $337,000 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 11%, what is the NPV of the project?

Answer 1

	Note 1
	Computation of MARC depreciation	1	2	3
	Depreciation rate		33.33%	44.45%	14.81%
	Depreciation amount		292,804	390,493	130,106
	Note 2
	Computation of post tax salvage value
	Sales price of asset =		514,000
	book value =		65,097
	Gain on sales		448,903
	Tax on gain		112,226
	Post tax salvage value=		401,774
	year	0	1	2	3
	Initial investment	(878,500)
	Working capital	(15,500)			15,500
	Operating cash flow
	Saving in cost		337,000	337,000	337,000
	depreciation		292,804.05	390,493.25	130,105.85
	Profit before tax		44,195.95	(53,493.25)	206,894.15
	Tax @ 25%		11,048.99	(13,373.31)	51,723.54
	Net income		33,146.96	(40,119.94)	155,170.61
	Operating cash flow		325,951.01	350,373.31	285,276.46
	Post tax salvage value
	Note -2				401,774
	Net cash flow	(894,000.00)	325,951.01	350,373.31	702,550.68	-
	PVIF @ 11%	1	0.900900901	0.811622433	0.731191381
	Present value	(894,000.00)	293,649.56	284,370.84	513,699.00	197,719.40
ans a)	Year 0 Cash flow	(894,000.00)
ans b)	Net operating cash flow
	Year 1 Cash flow	325,951.01
	Year 2 Cash flow	350,373.31
	Year 3 Cash flow	285,276.46
ans c)	Year 3 other cash flow	417,274.21
ans b)	NPV =	197,719.40