The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2648118 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, and it would cost another $24,000 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 $568,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $383,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.
What is the Year-0 net cash flow?
$ ________
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 15 %, what is the NPV of the project? Round your answer to the nearest dollar.
$ ________
Should the machine be purchased?
_________________
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, and it would cost another $24,000 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 $568,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $383,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.
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. 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)? Round your answer to the nearest dollar.
$ ________
If the project's cost of capital is 15 %, what is the NPV of the project? Round your answer to the nearest dollar.
$ ________
Should the machine be purchased?
_________________
Explanation / Answer
Part A)
The initial year cash flow would comprise of the amount of initial investment and the cost of installation. The formula for calculating Year 0 cash flow is:
Year 0 Cash Flow = -Base Price - Installation Costs - Initial Working Capital
_________________
Using the values provided in the question, we get,
Year 0 Cash Flow = -840,000 - 24,000 - 18,000 = -$882,000
____________________
Part B:
Operating Cash Flow Table:
Depreciation is calculated on the total of base price and installation cost.
Operating cash flow is calculated by adding annual after tax savings and annual depreciation.
____________________
Part C:
Year 3 cash flow would comprise of after-tax salvage value and return of initial working capital. The formula for calculating after-tax salvage value is:
After-Tax Salvage Value = Sales Value +/- Tax on Loss/Gain on Sale of Asset
Loss/Gain on Sale of Asset = Sales Value - Book Value
Book Value = Cost - Depreciation Upto Year of Sale
_________________
Book Value = (840,000 + 24,000) - (287,971.20 + 384,048 + 127,958.40) = $64,022.40
Gain on Sale of Asset = 568,000 - 64,022.40 = $503,977.60
After Tax Salvage Value = 568,000 - 35%*503,977.60 = $391,608
_________________
Additional Year-3 Cash Flow = 391,608 + 18,000 = $409,608
____________________
Part D:
NPV is the difference between the present value of cash inflows and cash outflows. The formula for calculating NPV is :
NPV = Cash Flow Year 0 + Cash Flow Year 1/(1+Discount Rate)^1 + Cash Flow Year 2/(1+Discount Rate)^2 + Cash Flow Year 3/(1+Discount Rate)^3 + Additional Cash Flow Year 3/(1+Discount Rate)^3
Discount rate is same as cost of capital.
_________________
Using the values calculated above, we get,
NPV = -882,000 + 349,740/(1+15%)^1 + 383,367/(1+15%)^2 + 293,735/(1+15%)^3 + 409,608/(1+15%)^3 = $174,462
____________________
Part E:
Yes, the machine should be purchased as it results in a Positive Net Present Value (NPV).
Year Annual Pre-Tax Savings (A) Depreciation (at MACRS Rates) (B) Savings after Depreciation (A-B) Tax on Savings after Depreciation After Tax Savings Operating Cash Flow (After Tax Savings + Depreciation) 1 383,000 287,971.20 95028.8, 33,260.08 61,768.72 $349,740 2 383,000 384,048 -1,048 -366.8 -681.2 $383,367 3 383,000 127,958.40 255,041.6 89,264.56 165,777.04 $293,735