The Campbell Company is considering adding a robotic paint sprayer to its produc

Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,021,000.00, and it would cost another $30,700.00 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 $586,500.00. The machine would require an increase in net working capital (inventory) of $8,100.00. The sprayer would not change revenues, but it is expected to save the firm $468,450.00 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 33.00%. d. If the project's cost of capital is 17.40%, what is the NPV of the project?

Possible answers:

$114,927.30

Explanation / Answer

Compute the Net Present value.

The answer does not match with the options given, please check with the answers. The procedure is correct.

Year 0 1 2 3 Cost 1051700 MACRS rate 33.33% 44.45% 14.81% Before tax cash flows 468450 468450 468450 Less: Depreaciation 350531.61 467480.65 155756.77 EBIT(Earnings before interest and taxes) 117918.39 969.35 312693.23 Less: Tax @33% 38913.0687 319.8855 103188.77 Earnings after tax 79005.3213 649.4645 209504.46 Add: Depreciation 350531.61 467480.65 155756.77 Operating cash flow 429536.9313 468130.1145 365261.23 Change in fixed Assets -1051700 0 0 340741.25 Change in working capital -8100 8100 Free cash flow -1059800 429536.9313 468130.1145 714102.48 Discount @17.4% 1 0.851788756 0.725544086 0.6180103 Present value of cash flows -1059800 365874.7285 339649.0358 441322.69 Net Present value (NPV) 87046.45078

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