New-Project Analysis The Campbell Company is considering adding a robotic paint
ID: 2724606 • 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 $1,180,000, and it would cost another $16,500 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 $522,000. The machine would require an increase in net working capital (inventory) of $16,500. The sprayer would not change revenues, but it is expected to save the firm $449,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. What is the Year-0 net cash flow? $ 1213000 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 13 %, what is the NPV of the project? Round your answer to the nearest dollar. $ Should the machine be purchased?
Explanation / Answer
Answer:The Year-0 net cash flow is $1213000
=1180000+16500+16500=1213000
Answer: Depreciable Basis = Cost + Additional Cost
= $1180000+ 16,500 = $1196500
Answer:3 Additional year 3 cash flow:
Book Value = Depreciable basis - Accumulated Depreciation (t=3)
= $1196500 – $1107839
= $8,8661
Book value $ 88661
Market value $522000
Gain from sale $433339
Tax (40%) $17,3335.6 ($433339*40%)
Answer:4
Yes, Machine should be Purchased.
Year 1 2 3 Net Revenue 449000 449000 449000 Less: Dep 398793 531844 177202 EBT 50207 -82844 271798 Less:taxes @ 40% 20083 -33138 108719 Net income 30124 -49707 163079 Add: Dep 398793 531844 177202 Net operating cash Flow 428917 482138 340281