Question

Problem 11-06
New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,050,000, and it would cost another $20,500 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 $557,000. The machine would require an increase in net working capital (inventory) of $9,500. The sprayer would not change revenues, but it is expected to save the firm $496,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

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 11 %, 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 net cash flow

Particulars	Amount
Base Price	1,050,000
Installation Cost	20,500
Increase in working capital	9,500
Year 0 cash outflow	1,080,000

Thus year 0 net cash outflow is $ 1,080,000.

b) Net operating cash flow

Deprecation calculation

Year	Calculation	Amount
1	(1050000 + 20500) * 33.33%	356,797.65
2	(1050000 + 20500) * 44.45%	475,837.25
3	(1050000 + 20500) * 14.81%	158,541.05
		991,175.95

Particulars	Year 1	Year 2	Year 3
Savings	496,000	496,000	496,000
Less: Depreciation	(356,797.65)	(475,837.25)	(158,541.05)
PBT	139,202.35	20162.75	337,458.95
Less: Tax	(41760.71)	(6048.83)	(101,237.69)
PAT	97,441.65	14,113.93	236,221.27
Add: Depreciation	356,797.65	475,837.25	158,541.05
Operating cash flow	454,239.30	489,951.18	394,762.32

C) Additonal cash inflow year 3

Residual value sprayer = Value - Depreciation

                                 = (1050000 + 20500) - 991,175.95

                                 = $ 79,324.05

Particulars	Calculation	Amount
Salvage value		557,000
Less: Tax	( 557,000 - 79324.05) * 30%	(143,302.79)
	Salvage inflow	413,697.22
	Net working capital	9,500
	Additional cash flow	423,197.22

D) NPV

Year	Cash flow	Present Value at 11%
0	(1,080,000)	(1,080,000)
1	454,239.30	409,224.59
2	489,951.18	397,655.37
3	394,762.32	288,646.81
3*	423,197.22	309,438.16
	NPV	324,964.93

Machine should be purchased since NPV is positive.