Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, and it would cost another $18,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $617,000. 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 $13,000. The sprayer would not change revenues, but it is expected to save the firm $315,000 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.

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

   $  

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

   Year 1:	$
   Year 2:	$
   Year 3:	$

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

   $  

4. If the project's cost of capital is 14%, what is the NPV of the project?

   $  

   Should the machine be purchased?

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-840,000-18500-13000
(871,500)	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	315,000	315,000	315,000
Less: Depreciation	286,138	381,603	127,144
Net Savings	28,862	-66,603	187,856
Less: Tax @25%	7,215.49	-16,650.81	46,964.04
Income after Tax	21,646.46	-49,952.44	140,892.11
Add: Depreciation	286,138	381,603	127,144
Operating Cash Flow	307,784.51	331,650.81	268,035.96
Add: After tax salvage value			478,653.71
Recovery of Working capital			13,000
Additional cash flows			491,654
Total Cash Flow	307,784.51	331,650.81	759,689.68
Written down value	63,615
Sale price	617000
Gain on sale	553,385
Tax	138346.288
After tax salvage value	478653.713
c.NPV = Present value of cash inflows – present value of cash outflows
= 307784.51*PVF(14%, 1 year) + 331650.81*PVF(14%, 2 years) + 759689.68*PVF(14%, 3 years) – 871500
166449.8373
Yes, should be purchased (since NPV is positive)