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 $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 $504,000.

The machine would require an increase in net working capital (inventory) of $19,500. The sprayer would not change revenues, but it is expected to save the firm $475,000 per year in before-tax operating costs, mainly labor.

Campbell's marginal tax rate is 40%.

Question A)What is the Year 0 net cash flow?

Question B) 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.

Question C) 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.

Question D) If the project's cost of capital is 13 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. Based on that value, Should the machine be purchased (yes or no)?

Answer 1

Based on the given data, pls find below steps, workings and answer:

Question A)What is the Year 0 net cash flow? Net Cash OUT Flow of $ 907500 in Year 0

Question B) What are the net operating cash flows in Years 1, 2, and 3? Cash Flows for Year 1, 2 & 3 are $ 403388.16, $ 442886.40 and $ 337605.12, respectively.

Question C) What is the additional Year 3 cash flow; Additional Year 3 Cash Flow is $ 348220.32

Question D) If the project's cost of capital is 13 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. Based on that value, Should the machine be purchased (yes or no)? NPV of this Project is $ 271637.12 and since the NPV is positive, the Machine should be purchased.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;