Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $880,000, and it would cost another $18,500 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 $625,000. The machine would require an increase in net working capital (inventory) of $12,000. The sprayer would not change revenues, but it is expected to save the firm $389,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

- What is the Year 0 net cash flow?

$ - 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 $ - 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.

$ - If the project's cost of capital is 12 %, what is the NPV of
the project? Do not round intermediate calculations. Round your
answer to the nearest dollar.

$

Should the machine be purchased?

-Select-YesNo

Answer #1

a. Year 0 Net Cash Flow = -$910500

b. Year 1 Net Operating Cash Flow = $353188

Year 2 Net Operating Cash Flow = $393153

Year 3 Net Operating Cash Flow = $286627

c. Additional Year 3 Cash Flow = $413632

d. NPV = $216696

e. The Machine is recommended as it results in Positive NPV

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