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.
What is the Year-0 net cash flow?
$
What are the net operating cash flows in Years 1, 2, and 3?
Year 1: | $ |
Year 2: | $ |
Year 3: | $ |
What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?
$
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.
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