Question

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,170,000, and it would cost another $20,000 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 $550,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $460,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. What is the Year-0 net cash flow? $   What are the net operating cash flows in Years 1, 2, and 3? 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)? $   If the project's cost of capital is 11 %, what is the NPV of the project? $   Should the machine be purchased? -Select-YesNoItem 7

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-1,170,000-20000-18000
(1,208,000)	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	460,000	460,000	460,000
Less: Depreciation	396,627	528,955	176,239
Net Savings	63,373	-68,955	283,761
Less: Tax @35%	22,180.55	-24,134.25	99,316.35
Income after Tax	41,192.45	-44,820.75	184,444.65
Add: Depreciation	396,627	528,955	176,239
Operating Cash Flow	437,819.45	484,134.25	360,683.65
Add: After tax salvage value			388,362.65
Recovery of Working capital			15,500
Additional cash flows			403,863
Total Cash Flow	437,819.45	484,134.25	764,546.30
Written down value	88,179
Sale price	550000
Gain on sale	461,821
Tax	161637.35
After tax salvage value	388362.65
c.NPV = Present value of cash inflows – present value of cash outflows
= 437,819.45*PVF(11%, 1 year) + 484134.25*PVF(11%, 2 years) + 764546.30*PVF(11%, 3 years) – 1208000
138395.8201
Yes, should be purchased (since NPV is positive)