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 $870,000, and it would cost another $22,000 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 $659,000. The machine would require an increase in net working capital (inventory) of $11,500. The sprayer would not change revenues, but it is expected to save the firm $412,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

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 11 %, 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 or No

Answer 1

a]

Year 0 net cash flow = -(base price + installation cost + Investment in working capital)

Year 0 net cash flow = -$903,500

e]

operating cash flows (OCF) = income after tax + depreciation

g]

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

additional Year 3 cash flow (Terminal cash flow) = $492,629

k]

NPV is calculated using NPV function in Excel

NPV is $367,345

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

NPV is $367,345

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

NPV is $367,345

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