Problem 11-6 New-Project Analysis The Campbell Company is considering adding a r
ID: 2710819 • 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 $1,010,000, 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 $668,000. The machine would require an increase in net working capital (inventory) of $14,000. The sprayer would not change revenues, but it is expected to save the firm $454,000 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 14 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
Explanation / Answer
What is the Year-0 net cash flow?
Year-0 net cash flow = - sprayer's base price - Installation cost - increase in net working capital
Year-0 net cash flow = -1010000-24000 - 14000
Year-0 net cash flow = -1048000
What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Machine cost = sprayer's base price + Installation cost
Machine cost = 1010000+24000
Machine cost = 1034000
Net operating cash flows in Years 1 = Saving in before-tax operating costs*(1-tax rate) + Depreciation * tax rate
Net operating cash flows in Years 1 = 454000*(1-40%) + 1034000*33.33%*40%
Net operating cash flows in Years 1 = $ 410,253
Net operating cash flows in Years 2 = Saving in before-tax operating costs*(1-tax rate) + Depreciation * tax rate
Net operating cash flows in Years 2 = 454000*(1-40%) + 1034000*44.45%*40%
Net operating cash flows in Years 2 = $ 456,245
Net operating cash flows in Years 3 = Saving in before-tax operating costs*(1-tax rate) + Depreciation * tax rate
Net operating cash flows in Years 3 = 454000*(1-40%) + 1034000*14.81%*40%
Net operating cash flows in Years 3 = $ 333,654
Answer
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 = (668000 - 40%*(668000-1034000*7.41%)) + 14000
Additional Year-3 cash flow = $ 445,448
If the project's cost of capital is 14 %, what is the NPV of the project? Round your answer to the nearest dollar.
NPV = Year-0 net cash flow + Year-1 net operating cash flow/(1+wacc) + Year-2 net operating cash flow/(1+wacc)^2 + Year-3 net operating cash flow/(1+wacc)^3 + Additional Year-3 cash flow /(1+wacc)^3
NPV = -1048000 + 410253/1.14 + 456245/1.14^2 + 333654/1.14^3 + 445448/1.14^3
NPV = $ 188,808
Year 1 410,253 Year 2 456,245 Year 3 333,654