Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $920,000, and it would cost another $20,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $500,000. 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 $304,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%.

a. What is the Year-0 cash flow?

b. What are the cash flows in Years 1,2, and 3?

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

d. If the projects cost of capital is 12%, what is the NPV?

Answer 1

Solution :-

Total Cost of Machine = $920,000 + $20,000 = $940,000

Book Value of Machine after 3 years = $940,000 - [ $313,302 + $417,830 + $139,214 ] = $69,654

Salvage Value after 3 years = $500,000

Gain on sale of machine = $500,000 - $69,654 = $430,346

Tax on Gain on Sale = $430,346 * 25% = $107,586.50

Net After tax Salvage Value = $500,000 - $107,586.50 = $392,413.50

(a) Year 0 Cash flow = - $955,500

(b) Year 1 Cash flow = $306,325.50

Year 2 = $332,457.50

Year 3 = $262,803.50

(c) Year 3 Additional Cash flow = $15,500 + $392,413.50 = $407,913.50

(D) The NPV of the Project = $60,411.1

Project is Acceptable

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