The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2726184 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $950,000, and it would cost another $20,000 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 $602,000. The machine would require an increase in net working capital (inventory) of $10,000. The sprayer would not change revenues, but it is expected to save the firm $378,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
A) What is the Year-0 net cash flow?
B) 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 $
C. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)?
D. If the project's cost of capital is 11%, what is the NPV of the project?
Should the machine be purchased?
Explanation / Answer
Part A:
0 Year Net Cash Flow = -950000-20000-10000 = -980000
Part B:
Year1
Year2
Year3
Annual Savings
378000
378000
378000
Less Depreciation
323301
431165
143657
Savings after Depreciation
54699
—53165
234343
Less Taxes
16410
—15950
70303
Savings after Taxes and Depreciation
38289
—69115
164040
Add Depreciation
324301
431165
143657
Operating Cash Flow
361590
362050
307697
Part C:
Additional Cash Flow in Year 3 = 602000 + (602000 - 71877*)×(.35) + 10000 = 771037
Part D:
To calculate IRR, you need to put the value of NPV as 0 and use following equation to derive IRR
NPV = 0 = -980000 + 361590/(1+r)^1 + 362050/(1+r)^2 + (307697 + 771037)/(1+r)^3
Solving for r, we get IRR as 30.2,/
Yes, the machine should be purchased.
*(970000-323301-431165-143657=71877)