Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,140,000, and it would cost another $22,500 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 $626,000. 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 $415,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

A. What is the Year 0 net cash flow?

$

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.

Year 1 $

Year 2 $

Year 3 $

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.

$

D. 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?

Yes or No

Answer 1

A: Year 0 cash flow= -1162500

B:

Year 1 $ 403985

Year 2 $ 455693

Year 3 $ 317867

C: Additional Year 3 cash flow= 1282644

D: NPV= $ 730079

E: Yes since the NPV is positive.

WORKINGS

Step 1: Compute the OCF

OCF		MACRS 3 year
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1	415000	387461.25	27538.75	11015.5	16523.25	403984.5
2	415000	516731.25	-101731.25	-40692.5	-61038.75	455692.5
3	415000	172166.25	242833.75	97133.5	145700.25	317866.5

Step 2: Compute the after tax salvage

Salvage
Purchase price	1162500
Less: Depreciation	1076359
Closing book value	2238859
Selling price	626000
Gain/(loss)	-1612859
Tax/ Saving	-645144
Net salvage	1271144

Step 3: Net Cash flows and NPV

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-1162500		-11500		-1174000
1		$403,984.50			403984.5
2		$455,692.50			455692.5
3		$317,866.50	11500	1271143.5	1600510
				NPV	$730,079.37

Formulae in Excel