Question

# New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....

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 \$19,000 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 \$564,000. 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 \$404,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. 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 11 %, what is the NPV of the project?

\$

Should the machine be purchased

Question - a

Cash flow at t = 0 = 1081,000

 Base price 1050000 Install cost 19000 Increase in WC 12000 1081000

Question - b

Operating cash flows

 Year - 1 389689 Year - 2 425351 Year - 3 330296

Method of calculation of operating cash flows

 Year - 1 Year - 2 Year - 3 Expected savings 404000 404000 404000 (-) Depreciation 356297.70 475170.50 158318.90 Taxable Income 47702.30 -71170.50 245681.10 (-) Tax 14310.69 -21351.15 73704.33 Net Income 33391.61 -49819.35 171976.77 (+) Depreciation 356297.7 475170.5 158318.9 Operating CF 389689 425351 330296

Depreciation are computed on cost of machine = 1050,000 + 19,000 = 1069,000 using the given rates 33.33%, 44.45% and 14.81% respectively.

Question - c

Additional Year - 3 cash flow = 430564

 Salvage value 564000 (-) Book value = 1069000*0.0741 79212.9 Profit on sale 484787.1 Tax 145436.13 Salvage(after tax) 418563.87 Working capital recovery 12000 Additional cash flow 430563.87

Question - d

 Year CF DF PV 0 -1081000 1 -1081000 1 389689 0.9009009 351071.5 2 425351 0.8116224 345224.5 3 330296 0.7311914 241509.3 3 430563.87 0.7311914 314824.6 NPV 171630

As the project is having a positive NPV, the machine can be purchased.