The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2725863 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,170,000, and it would cost another $22,000 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 $559,000. 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 $392,000 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 11 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
Should the machine be purchased?
Yes or No?
Explanation / Answer
The Campbell Company All Amounts in $ What is the Year-0 net cash flow? $ Purchase Cost 1170000 Installation Costs 22000 Increase in Working Capital 12000 Total 1204000 Net Operating Cash Flows for Years 1 to 3 Years I II III Savings in Labor Cost 392000 392000 392000 Less : Depreciation 397294 529844 176535 Net Operating Income -5294 -137844 215465 Tax Impact @ 40% -2117 -55138 86186 Gain/(Loss) post Taxes -7411 -192982 129279 Add : Depreciation 397294 529844 176535 Operating Cash Flows 389883 336862 305814 Additional Year-3 Cash Flow will be $ 559,000 only (Working Capital is not mentioned as being recouped). With the project's Cost of Capital as 11% The Net Present Value thereof works out to $ 11,252.13 Since the Net Present Value of the project is positive, hence the machine should definitely be purchased.