Question

1.) The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,090,000, and it would cost another $24,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $642,000. 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 $15,500. The sprayer would not change revenues, but it is expected to save the firm $321,000 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.

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

b.What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)?

d. If the project's cost of capital is 10%, what is the NPV of the project?

Should the machine be purchased?

Yes/No

Answer 1

Question a:

Year 0 net cash flow is -$1,129,500

Question b:

Net Operating Cash Flows for Year 1 is $333,574.05

Net Operating Cash Flows for Year 2 is $364,543.25

Net Operating Cash Flows for Year 3 is $281,995.85

Question c:

Additional cash flow for year 3 is $517,636.85

Question d:

NPV of the Project is $75,800.43

Yes, Machine should be Purchased

Calculation of NPV of the Project
Particulars	0	1	2	3
Initial Investment
Sprayer's base price	-1090000
Installation cost	-24000
investment in net working capital	-15500
Net Initial Investment (A)	-1129500
Operating Cash Flows
Saving in Operating Costs (B)		321000	321000	321000
Less: Depreciation (C ) ($1,114,000 * 0.3333, 0.4445 , 0.1481)		371296.2	495173	164983.4
Profit Before Tax (D = B-C)		-50296.2	-174173	156016.6
Less: Tax @25% (E = D*25%)		-12574.05	-43543.25	39004.15
Profit After Tax (F = D-E)		-37722.15	-130629.75	117012.45
Add back Depreciation (G = C)		371296.2	495173	164983.4
Net Operating Cash Flows (H = F+G)		333574.05	364543.25	281995.85
Terminal Value
Sale Value (I)				642000
Less: Unclaimed Depreciation (J) ($1,114,000 * 0.0741)				82547.4
Profit on sale (K = I-J)				559452.6
Less: Tax @25% (L = K*25%)				139863.15
After Tax sale value (M = K-L)				419589.45
Add back Unclaimed Depreciation (N = J)				82547.4
After Tax Salvage Value (O = M+N)				502136.85
Recovery of Working Capital (P)				15500
Net Terminal Value (Q = O+P)				517636.85
Total Cash Flows (R = A+H+Q)	-1129500	333574.05	364543.25	799632.7
Discount Factor @10% (S) 1/(1+10%)^n n = 0,1,2,3	1	0.90909091	0.82644628	0.7513148
Discounted Cash Flows (T = R*S)	-1129500	303249.136	301275.413	600775.883
NPV of the Project	75800.43