The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2765132 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $810,000, and it would cost another $17,000 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 $660,000. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change revenues, but it is expected to save the firm $412,000 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 12 %, what is the NPV of the project? Round your answer to the nearest dollar.
$ ________
Should the machine be purchased?
_________________
Explanation / Answer
Details Year 0 Year 1 Year 2 Year 3 MACRS Rate 33.33% 44.45% 14.81% Macvhine cost 827,000 Total depreciation= 765,719 Book value after 3 years 61,281 Resale value after 3 years 660,000 Capital Gain 598,719 NPV calculation Investment in Robot (827,000) Investment in NWC (13,000) 13,000 Salvage 660,000 Pre Tax saving in operating cost 412,000 412,000 412,000 Less depreciation= (275,639) (367,602) (122,479) Pretax income 136,361 44,399 289,521 Tax @40% (54,544) (17,759) (115,809) Add Tax on capital Gain (239,488) Post Tax Income (including salvage) 218,177 71,038 883,746 Add back depreciation 275,639 367,602 122,479 Net Cash flows (including NWC return) (840,000) 493,817 438,639 1,019,225 PV factor @12% 1 0.8929 0.7972 0.7118 PV of cash flows (840,000) 440,908 349,680 725,464 NPV = $ 676,052.30 1 Year 0 net cash flow= $ (840,000.00) Year 1 Year 2 Year 3 2 Net Operating Cash flow $ 493,816.5 $ 438,639.1 $ 1,019,225.1 Additional return in year 3 433,512 3 NPV = $ 676,052.30 As the NPV is positive the machine can be purchased.