New-Project Analysis The Campbell Company is considering adding a robotic paint
ID: 2651234 • 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 $990,000, 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 $594,000. The machine would require an increase in net working capital (inventory) of $9,500. The sprayer would not change revenues, but it is expected to save the firm $464,000 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.
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 12 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
Should the machine be purchased?
-Select-YesNo
Explanation / Answer
What is the Year-0 net cash flow?
Year-0 net cash flow = - (sprayer's base price + Installation + Additional Working Capital required)
Year-0 net cash flow = - (990000+23500 + 9500)
Year-0 net cash flow = - $ 1023000
What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Net operating cash flows in Years 1 = 464000*(1-35%) + (990000+23500)*33.33%*35%
Net operating cash flows in Years 1 = $ 419830
Net operating cash flows in Years 2 = 464000*(1-35%) + (990000+23500)*44.45%*35%
Net operating cash flows in Years 2 = $ 459275
Net operating cash flows in Years 3 = 464000*(1-35%) + (990000+23500)*14.81%*35%
Net operating cash flows in Years 3 = $ 354135
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.
Additional Year-3 cash flow = after-tax salvage + return of working capital
Additional Year-3 cash flow = (594000 - (594000 - 1013500*7.41%)*35%) + 9500
Additional Year-3 cash flow = $ 421885
If the project's cost of capital is 12 %, what is the NPV of the project? Round your answer to the nearest dollar.
NPV = - Initial Investment + Net operating cash flows in Years 1 /1.12 + Net operating cash flows in Years 2 /1.12^2 + Net operating cash flows in Years 3 /1.12^3 + Additional Year-3 cash flow/1.12^3
NPV = - 1023000 + 419830/1.12 + 459275/1.12^2 + 354135/1.12^3 + 421885/1.12^3
NPV = $ 270335
Should the machine be purchased?
Yes