Question

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The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,200,000, and it would cost another $16,000 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 $664,000. 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 $479,000 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 15 %, 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

Initial Investment = Base Price + Installation Cost
Initial Investment = $1,200,000 + $16,000
Initial Investment = $1216000

Useful Life = 3 years

Depreciation Year 1 = 33.33% * $1216000
Depreciation Year 1 = $405292.8

Depreciation Year 2 = 44.45% * $1216000
Depreciation Year 2 = $540512

Depreciation Year 3 = 14.81% * $1216000
Depreciation Year 3 = $180089.6

Book Value at the end of Year 3 = $90105.6

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $664,000 - ($664,000 - $90105.6) * 0.35
After-tax Salvage Value = $463136.96

Initial Investment in NWC = $17,000

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$1216000 - $17000
Net Cash Flows = -$1,233,000

Year 1:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $479,000 * (1 - 0.35) + 0.35* $405292.8
Operating Cash Flow = $453202.48

Year 2:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $479,000 * (1 - 0.35) + 0.35 * $540512
Operating Cash Flow = $500529.2

Year 3:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $479,000 * (1 - 0.35) + 0.35* $180089.6
Operating Cash Flow = $374381.36

Additional Cash Flows = NWC recovered + After-tax Salvage Value
Additional Cash Flows = $17000+ $463136.96
Additional Cash Flows = $480136.96

Required Return = 15%

NPV = -$1233000+ $453202.48/1.15 + $500529.2/1.15^2 + $374381.36/1.15^3 + $480136.96/1.15^3
NPV = -$1233000+ $453202.48*0.87 + $500529.2*0.756+ $374381.36*0.658 + $480136.96*0.658

= 101,959.29

Yes, the machine should be purchased.