Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $810,000, and it would cost another $19,000 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 $569,000. The machine would require an increase in net working capital (inventory) of $18,500. The sprayer would not change revenues, but it is expected to save the firm $360,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

What is the Year 0 net cash flow?
$

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	$

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.
$

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?

Answer 1

a) Year 0 net cash flow
Net cash outflow = -Base price of Sprayer-Installation charges-Net working capital
Net cash outflow = -810,000-19,000-18,500
Net cash outflow		-$847,500
In year 0, company would have net cash outflow of $847,500
b)
Net operating cash flow is equal to after tax savings in cost plus tax shield on depreciation
Operating cash flow in year 1
(360,000)*(1-0.35) + [(810,000+19,000)*0.3333*35%]
234000+96707
330,707
The operating cash flow in year 1 is $330,707
Operating cash flow in year 2
(360,000)*(1-0.35) + [(810,000+19,000)*0.4445*35%]
234000+128971.68
362,971.68
The operating cash flow in year 2 is $362,971.68
Operating cash flow in year 3
(360,000)*(1-0.35) + [(810,000+19,000)*0.1481%*35%]
234000+42971.22
276,971.22
The operating cash flow in year 3 is $276,971.22
The cash flow at end of year 3 would consists of after tax salvage value and recovery of working capital
Calculation of after tax salvage value
Salvage value		$569,000.00
Less : Book Value		61428.90
[810000+19000-276305.70-368490.5-122774.9]
Gain on Sale		$507,571.10
Tax on Gain @ 35%		$177,649.89
After tax salvage value (569000-177649.89)		$391,350.12
Cash flow at end of year 3 = (391350.12+18,500)		$409,850.12
Cash flow at end of year 3 would be $409,850.12
NPV of a project is the present value of cash inflow less present value of cash outflow. If the value is positive it means the company has higher inflow than outlay from project and therefore project should be accepted
Calculation of NPV
Year	Cash flow	Discount factor @ 11%[1/(1+r)^n)		Present Value
0	-$847,500	1.00000	1/(1.11^0)	-$847,500.00
1	330,707	0.90090	1/(1.11^1)	$297,934.23
2	362,971.68	0.81162	1/(1.11^2)	$294,595.96
3	276,971.22	0.73119	1/(1.11^3)	$202,518.97
3	$409,850.12	0.73119	1/(1.11^3)	$299,678.87
	NPV			$247,228.03
The NPV of the project is $247,228.03