Question

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

Answer 1

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.