Problem 11-6 New-Project Analysis The Campbell Company is considering adding a r
ID: 2645087 • Letter: P
Question
Problem 11-6
New-Project Analysis
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $990,000, and it would cost another $19,500 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 $587,000. The machine would require an increase in net working capital (inventory) of $18,500. The sprayer would not change revenues, but it is expected to save the firm $357,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
A. What is the Year-0 net cash flow?
$ 1,028,000
B. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
C. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
$ 450,600
D. If the project's cost of capital is 15 %, what is the NPV of the project? Round your answer to the nearest dollar.
$ ????
E. Should the machine be purchased?
yes
(I NEED HELP WITH PART D)
Year 1 $ 350,840 Year 2 $ 384,517 Year 3 $ 294,752Explanation / Answer
NPV = -1028000 + 305231 + 290695 + 491258 = $ 59184
Note1
Cash flow from sale of the sprayer:
Book value of the sprayer at the end of year 3
= 1009500 - (336466 + 448723 + 149507)
= $ 74804
Profit on sale of the sprayer = 587000 - 74804 = $ 512196
Tax on profit on sale @ 30% = $ 153659
After Tax cash flow from the sale of machine = 587000 - 153659 = $433341
0 1 2 3 Purchase Cost -990000 Installation cost -19500 Increase in Working Capital -18500 Savings in before tax operating cost 357000 357000 357000 Less: Depreciation 336466.35 448722.75 149506.95 Savings / (loss)after depreciation 20533.65 -91722.75 207493.05 Less: Tax @ 30% 6160.095 62247.915 Add: Tax Savings @ 30% 27516.825 Savings in operating cost after tax 14373.555 -64205.925 145245.135 Add: Depreciation 336466.35 448722.75 149506.95 Net operating cash flow after tax due to savings in operating cost 350840 384517 294752 Recovery of working capital 18500 After tax Cash flow from sale of paint sprayer (note 1) 433341 net cash flow -1028000 350840 384517 746593 Discount factor @ 15% 1 0.87 0.756 0.658 Discounted Cash flow -1028000 305231 290695 491258