Question

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $850,000, and it would cost another $17,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $474,000. 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 $12,000. The sprayer would not change revenues, but it is expected to save the firm $397,000 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 13%, what is the NPV of the project?

   $ ____

5. Should the machine be purchased?

   A. Yes; B. No

Answer 1

(e) yes, the machine should be purchased because NPV of machine is positive.