Question

In: Finance

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....

New-Project Analysis

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 $16,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $594,000. 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 $13,000. The sprayer would not change revenues, but it is expected to save the firm $329,000 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.

  1. What is the Year-0 net cash flow?

  2. If the project's cost of capital is 14%, what is the NPV of the project?

Solutions

Expert Solution

(a.) Year 0 net cash outflow = Purchase of sprayer + Installation Expenses + Net Working Capital

= 810000 + 16500 + 13000

= 839500

(b.) Calculation of NPV of the project

Year 0 Year 1 Year 2 Year 3
Initial Investment ( 810000 + 16500) 826500
Saving in Operating Cost 329000 329000 329000
Less : Depreciation (Working Note) 275472.5 367379.3 122404.7
Earning before taxes 53527.55 -38379.3 206595.4
Taxes @ 25% -13381.9 9594.813 -51648.8
Earnings After Taxes 40145.66 -28784.4 154946.5
Add : Depreciation 275472.5 367379.3 122404.7
Plus : Salvage Value 594000
Less : tax on salvage @ 25% 133189.1
NWC 13000
Plus : Recapture of NWC 13000
Operating Cash Flows 839500 315618 338595 751162.1
PV Factor @ 14% 1 0.877193 0.769468 0.674972
PV of Net Cash flows (Inflow) 276858 260537.7 507013
PV of Net Cash flows (Outflow) 839500
The net present value (NPV) of this project is         = $ 204908.712 or $ 204909
NPV = PV of cash inflow - PV of cash outflow
        = 1044408.712- 839500
        = $ 204908.712 or $ 204909
Working Note :
Year 1 : 826500* 33.33% = 275472.45
Year 2 : 826500 * 44.45% = 367379.25
Year 3 : 826500 * 14.81% = 122404.65
Book Value = 826500 * 7.41% = 61243.65
Gain on Sale = Salvage Value - Book Value
                          = 594000- 61243.65
                          = 532756.35
Tax on Gain on Sale = 532756.35 * 0.25 = 133189.0875

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, 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 $628,000. The machine would require an increase in net working capital (inventory) of $13,500. The sprayer would not change revenues, but...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $890,000, and it would cost another $20,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $637,000. 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 $17,500. The sprayer would not change...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $21,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $549,000. 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 $18,500. The sprayer would not change...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $890,000, and it would cost another $19,500 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 $623,000. The machine would require an increase in net working capital (inventory) of $20,000. The sprayer would not change revenues, but...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,040,000, and it would cost another $20,500 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 $663,000. The machine would require an increase in net working capital (inventory) of $9,000. The sprayer would not change revenues, but...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis 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 $25,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $581,000. 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...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,020,000, and it would cost another $25,000 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 $631,000. The machine would require an increase in net working capital (inventory) of $20,000. The sprayer would not change revenues, but...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $23,000 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 $620,000. The machine would require an increase in net working capital (inventory) of $14,000. The sprayer would not change revenues, but...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
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 $25,000 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 $566,000. The machine would require an increase in net working capital (inventory) of $9,500. The sprayer would not change revenues, but...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $950,000, and it would cost another $23,000 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 $637,000. The machine would require an increase in net working capital (inventory) of $19,000. The sprayer would not change revenues, but...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT