Question

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $820,000, and it would cost another $18,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $626,000. 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 $17,000. The sprayer would not change revenues, but it is expected to save the firm $377,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

What is the Year-0 net cash flow? $

What are the net operating cash flows in Years 1, 2, and 3? 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)? $

If the project's cost of capital is 13%, what is the NPV of the project? $ Should the machine be purchased?

Answer 1

Information

Sprayer's base price	820,000.00
Installation cost	18,500.00
Total Initial capital outlay	838,500.00

Depreciation Computation

Year	1	2	3
Purchase / opening book value	838,500.00	465,786.75	341,604.90
Depreciation rate	0.33330	0.44450	0.14810
Depreciation	279,472.05	372,713.25	124,181.85
Closing book value	465,786.75	341,604.90	341,604.90

Increase in Working capital (in $)	17,000.00
Savings in pre tax operating costs (in $)	377,000.00

Computation of Year 0 Cashflows

Year 0 Cashflows	Amount (in $)
Total Initial Capital Outlay	(838,500.00)
Increase in working capital	(17,000.00)
Total Initial Cashflows	(855,500.00)

Computation of Net Operating Cashflows for Year 1 to 3

Year	1	2	3
Savings from operating costs	377,000.00	377,000.00	377,000.00
Less : Depreciation	279,472.05	372,713.25	124,181.85
Profit before tax	97,527.95	4,286.75	252,818.15
Less : Tax @ 25%	24,381.99	1,071.69	63,204.54
Profit after tax	73,145.96	3,215.06	189,613.61
Add : Depreciation	279,472.05	372,713.25	124,181.85
Cashflow after tax	352,618.01	375,928.31	313,795.46

Computation of Year 3 Additional cashflows

Details	Amount (in $)
Sale value of Sprayer	626,000.00
Less : Closing book value for Year 3	341,604.90
Profit from sale of Sprayer	284,395.10
Less : Tax on profit from sale of Sprayer @25%	71,098.78
Profit after tax from sale of Sprayer	213,296.33
Add : Closing Book value of Sprayer as on Year 3	341,604.90
Cashflow from sale of Sprayer	554,901.23
Claw back of Working capital at the end of Year 3	17,000.00
Total Additional Year 3 / Terminal cashflows	571,901.23

Computation of NPV

Cashflow Table

Year	0	1	2	3
Initial Cashflows
Total Initial Capital Outlay	(838,500.00)
Increase in working capital	(17,000.00)
Total Initial Cashflows	(855,500.00)
Intermediate Cashflows
Savings from operating costs		377,000.00	377,000.00	377,000.00
Less : Depreciation		279,472.05	372,713.25	124,181.85
Profit before tax		97,527.95	4,286.75	252,818.15
Less : Tax @ 25%		24,381.99	1,071.69	63,204.54
Profit after tax		73,145.96	3,215.06	189,613.61
Add : Depreciation		279,472.05	372,713.25	124,181.85
Operating Cashflows after tax		352,618.01	375,928.31	313,795.46
Terminal Cashflows
Sale value of Sprayer				626,000.00
Less : Closing book value for Year 3				341,604.90
Pre-tax Profit from sale of Sprayer				284,395.10
Less : Tax on profit from sale of Sprayer @25%				71,098.78
Profit after tax from sale of Sprayer				213,296.33
Add : Closing Book value of Sprayer as on Year 3				341,604.90
Cashflow from sale of Sprayer				554,901.23
Claw back of Working capital at the end of Year 3				17,000.00
Total Additional Year 3 / Terminal cashflows				571,901.23
Net cashflows (Initial + Intermediate + Terminal)	(855,500.00)	352,618.01	375,928.31	885,696.69
PV factor @ 13% ---> Formula --> 1/(1+Discount rate)^nth year)	1.0000	0.8850	0.7831	0.6931
PV of Cashflows (Net cashflows x PV factor)	(855,500.00)	312,051.34	294,407.01	613,832.23
NPV	364,790.58

Since NPV of the project is positive, it is beneficial to take up the project to purchase Paint Sprayer.