Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,140,000, 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 $539,000. The machine would require an increase in net working capital (inventory) of $14,000. The sprayer would not change revenues, but it is expected to save the firm $495,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. a. What is the Year 0 net cash flow? $ b. 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 $ c. 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. $ d. If the project's cost of capital is 13 %, 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

a) Year 0 netc cash flow of the Project is -$1,176,000

b) Operating Cash Flow in Year 1 is $960,786.09

Operating Cash Flow in Year 2 is $1,173,989.85

Operating Cash Flow in Year 3 is $605,702.13

c) Additional Cash Flow in Year 3 is $492,421.93

d) NPV of the Project is $1,354,714.49

Calculation of Net Present value			Amount in $
Particulars	0	1	2	3
Initial Investment
Sprayer Base Price	-1140000
Installation Cost	-22000
Net Investment (A)	-1162000
Working Capital (B)	-14000
Total Net Investment (C = A+B)	-1176000
Operating Cash flows
Decrease in operating costs (C )		495000	495000	495000
Less: Depreciation (D) ($1,162,000 *33.33%, 44.45%,14.81%)		387294.60	516509.00	172092.20
Profit Before Tax (E = C-D)		882294.60	1011509.00	667092.20
Less: Tax @35%(F = E*35%)		308803.11	354028.15	233482.27
Profit After Tax (G = E-F)		573491.49	657480.85	433609.93
Add back Depreciation (H = D)		387294.60	516509.00	172092.20
Net Operating Cash flows (I = G+H)		960786.09	1173989.85	605702.13
Salvage Value
Sale value of sprayer (J)				539000
Less: Book value of machine (K)            (Depreciation not claimed             $1,162,000 * 7.41%)				86104.2
Profit on sale of sprayer (L = J-K)				625104.2
Less: Tax @35% (M = L*35%)				218786.47
Profit after tax (N = L-M)				406317.73
Add back Depreciation (O = K)				86104.2
Net Terminal Value (P = N+O)				492421.93
Total Cash flows (Q = C+I+P)	-1176000	960786.09	1173989.85	1098124.1
Discount Factor @13% ® 1/(1+13%)^n n=0,1,2,3	1	0.884955752	0.78314668	0.6930502
Discounted Cash flows	-1176000	850253.177	919406.257	761055.06
Net Present Value	1354714.49