New-Project Analysis The Campbell Company is considering adding a robotic paint
ID: 2647585 • Letter: N
Question
New-Project Analysis
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $930,000, 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 $687,000. 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 $391,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.
What is the Year-0 net cash flow?
$
What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
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.
$
If the project's cost of capital is 10 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
Should the machine be purchased?
Explanation / Answer
Yes because it has positive NPV
Particulars Year 0 Year 1 Year 2 Year 3 Sprayer's Base Price ($930,000) Installation cost ($23,500) Net Working capital Requirment ($12,000) Savings $391,000 $391,000 $391,000 $391,000 Depriciation ($88,824) ($118,459) ($39,469) ($19,748) Salvage Value $687,000 Working capital release $12,000 Operating Cash Flow ($663,324) $272,541 $351,531 $1,070,252 Tax rate @ 40% ($109,016) ($140,613) ($428,101) Net Cash Flow ($663,324) $163,524 $210,919 $642,151 Present Value factor @ 10% 1 0.9090909 0.8264463 0.7513148 Present Value of cash flows ($663,324) $148,659 $174,313 $482,458 NPV $142,105