Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,110,000, 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 $542,000. The machine would require an increase in net working capital (inventory) of $13,500. The sprayer would not change revenues, but it is expected to save the firm $389,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

What is the Year 0 net cash flow?

What are the net operating cash flows in Year 1, Year 2, and Year 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.

NPV =

Should the machine be purchased?

Answer 1

Solution:-

To Calculate Net Operating cash flows and Net Present Value-

To Calculate Additional Year 3 Cash Flows-

Book Value of Machine at year end 3 = ($11,10,000 + $23,000) - (33.33% + 44.45% + 14.81%)

Book Value of Machine at year end 3 = $83,955.30

Capital Gain = Salvage Value - Book Value

Capital Gain = $5,42,000 - $83,955.30

Capital Gain = $4,58,044.70

Tax on Capital Gain = $4,58,044.70 * 0.40

Tax on Capital Gain = $1,83,217.88

After Tax Salvage Value = $5,42,000 - $1,83,217.88

After Tax Salvage Value = $3,58,782.12

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