Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,150,000, and it would cost another $22,000 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 $562,000. The machine would require an increase in net working capital (inventory) of $19,500. The sprayer would not change revenues, but it is expected to save the firm $499,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. 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?

Year 1: $

Year 2: $

Year 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 13 %, what is the NPV of the project?

$

Should the machine be purchased?

Answer 1

Time line		0	1	2	3
Cost of new machine		-1172000
Initial working capital		-19500
=Initial Investment outlay (answer a)		-1191500
3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.0000%
Profits			499000	499000	499000
-Depreciation	=Cost of machine*MACR%		-390627.6	-520954	-173573.2	86845.2	=Salvage Value
=Pretax cash flows			108372.4	-21954	325426.8
-taxes	=(Pretax cash flows)*(1-tax)		65023.44	-13172.4	195256.08
+Depreciation			390627.6	520954	173573.2
=after tax operating cash flow (answer b)			455651.04	507781.6	368829.28
reversal of working capital					19500
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				337200
+Tax shield on salvage book value	=Salvage value * tax rate				34738.08
=Terminal year after tax cash flows (answer c)					391438.08
Total Cash flow for the period		-1191500	455651.04	507781.6	760267.36
Discount factor=	(1+discount rate)^corresponding period	1	1.13	1.2769	1.442897
Discounted CF=	Cashflow/discount factor	-1191500	403231.01	397667.476	526903.42
NPV (answer d)=	Sum of discounted CF=	136301.902