Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $870,000, 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 $559,000. The machine would require an increase in net working capital (inventory) of $8,000. The sprayer would not change revenues, but it is expected to save the firm $458,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

1. What is the Year-0 net cash flow?
   $ ____
2. 
   
3. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.

   Year 1	$ ___
   Year 2	$ ___
   Year 3	$ ___

4. 
   
5. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
   $ _____
6. 
   
7. 
   
8. If the project's cost of capital is 11 %, what is the NPV of the project? Round your answer to the nearest dollar. $_____

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-870,000-23000-8000
(901,000)	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	458,000	458,000	458,000
Less: Depreciation	297,637	396,939	132,253
Net Savings	160,363	61,062	325,747
Less: Tax @30%	48,108.93	18,318.45	97,724.01
Income after Tax	112,254.17	42,743.05	228,022.69
Add: Depreciation	297,637	396,939	132,253
Operating Cash Flow	409,891.07	439,681.55	360,275.99
Add: After tax salvage value			411,151.39
Recovery of Working capital			8,000
Additional cash flows			419,151
Total Cash Flow	409,891.07	439,681.55	779,427.38
Written down value	66,171
Sale price	559000
Gain on sale	492,829
Tax	147848.61
After tax salvage value	411151.39
c.NPV = Present value of cash inflows – present value of cash outflows
= 409,891.07*PVF(11%, 1 year) + 439681.55*PVF(11%, 2 years) + 779427.38*PVF(11%, 3 years) – 901000
395037.2263
Yes, should be purchased (since NPV is positive)