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 $16,000 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 $654,000. 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 $435,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

1. What is the Year 0 net cash flow?
   $
2. 
   
3. 
   
4. 
   
5. 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	$

6. 
   
7. 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.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 10 %, 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

Time line		0	1	2	3
Cost of new machine		-1166000
Initial working capital		-18000
=a. Initial Investment outlay		-1184000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			435000	435000	435000
-Depreciation	=Cost of machine*MACR%		-388627.8	-518287	-172684.6	86400.6	=Salvage Value
=Pretax cash flows			46372.2	-83287	262315.4
-taxes	=(Pretax cash flows)*(1-tax)		30141.93	-54136.55	170505.01
+Depreciation			388627.8	518287	172684.6
=b. after tax operating cash flow			418770	464151	343190
reversal of working capital					18000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				425100
+Tax shield on salvage book value	=Salvage value * tax rate				9600
=c. Terminal year after tax cash flows					452700
Total Cash flow for the period		-1184000	418769.73	464150.45	795889.61
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331
Discounted CF=	Cashflow/discount factor	-1184000	380699.7545	383595.41	597963.64
d. NPV=	Sum of discounted CF=	178259

e. Buy machine as NPV is positive