Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,140,000, and it would cost another $22,500 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 $626,000. The machine would require an increase in net working capital (inventory) of $11,500. The sprayer would not change revenues, but it is expected to save the firm $415,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

A. What is the Year 0 net cash flow?

$ -----------

B. 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 $ -------------

C. 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.

$ -------------

D. 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?

Yes --- or No-----

Answer 1

Year 0 cash flow = base price + installment cost + working capital investment

= -1140,000-22500-11500

=-$1,174,000

Operating cash flows

Year 1 = (415000-1162500*33.33%)(1-40%)+387,461.25

=$403,984.5

Year 2 = (415000-1162500*44.45%)(1-40%) + 516731.25

=$455,692.5

Year 3 = (415000- 1162500*14.81%)(1-40%)+ 172166.25

=$317,866.5

Additional cash flows in year 3 = after tax salvage value + recovery of working capital

=626000 - (626000-86141.25)*40% + 11500

=$421,556.5

NPV = Present value of cash inflows - present value of cash outflows

=$100,459.98

Should be purchased since NPV is positive