Question

Problem 11-06
New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,090,000, and it would cost another $18,000 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 $551,000. The machine would require an increase in net working capital (inventory) of $11,000. The sprayer would not change revenues, but it is expected to save the firm $414,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

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 10 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
    $

Answer 1

Operating cash flow (OCF) 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 $126,473