Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $930,000, 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 $667,000. The machine would require an increase in net working capital (inventory) of $10,000. The sprayer would not change revenues, but it is expected to save the firm $488,000 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 10 %, 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

Time line		0	1	2	3
Cost of new machine		-952000
Initial working capital		-10000
= . Initial Investment outlay		-962000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			488000	488000	488000
-Depreciation	=Cost of machine*MACR%		-317301.6	-423164	-140991.2	70543.2	=Salvage Value
=Pretax cash flows			170698.4	64836	347008.8
-taxes	=(Pretax cash flows)*(1-tax)		110953.96	42143.4	225555.72
+Depreciation			317301.6	423164	140991.2
= . after tax operating cash flow			428255.56	465307.4	366546.92
reversal of working capital					10000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				433550
+Tax shield on salvage book value	=Salvage value * tax rate				24690.12
= . Terminal year after tax cash flows					468240.12
Total Cash flow for the period		-962000	428255.56	465307.4	834787.04
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331
Discounted CF=	Cashflow/discount factor	-962000	389323.2364	384551.5702	627187.8588
. NPV=	Sum of discounted CF=	439062.67