Question

Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,500 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $8,000 per year for 5 years.

1. Calculate the two projects' NPVs, assuming a cost of capital of 14%. Round your answers to the nearest cent.

   Project S	$
   Project L	$

   Which project would be selected, assuming they are mutually exclusive?

2. Calculate the two projects' IRRs. Round your answers to two decimal places.

   Project S	%
   Project L	%

   Which project would be selected, assuming they are mutually exclusive?
   

3. Calculate the two projects' MIRRs, assuming a cost of capital of 14%. Round your answers to two decimal places.

   Project S	%
   Project L	%

   Which project would be selected, assuming they are mutually exclusive?

4. Calculate the two projects' PIs, assuming a cost of capital of 14%. Round your answers to two decimal places.

   Project S
   Project L

   Which project would be selected, assuming they are mutually exclusive?
   

   Which project should actually be selected?

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 $23,500 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 $506,000. The machine would require an increase in net working capital (inventory) of $8,000. The sprayer would not change revenues, but it is expected to save the firm $403,000 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 13 %, 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

1)