The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2766179 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, 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 $552,000. The machine would require an increase in net working capital (inventory) of $9,000. The sprayer would not change revenues, but it is expected to save the firm $398,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.
What is the Year-0 net cash flow?
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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 14 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
Explanation / Answer
Year 0 1 2 3 Savings in Cost (A) $0.00 $398,000.00 $398,000.00 $398,000.00 Post Tax Savings in Cost (B = A*0.60) $0.00 $238,800.00 $238,800.00 $238,800.00 Depreciation ( C) $0.00 $285,471.45 $380,714.25 $126,847.65 Depreciation Tax Shield (D = C*0.40) $0.00 $114,188.58 $152,285.70 $50,739.06 Post tax operating cash inflow (E = B + D) $0.00 $352,988.58 $391,085.70 $289,539.06 Net Working Capital (F) -$9,000.00 $0.00 $0.00 $9,000.00 Machine Cost including Installation (G) -$856,500.00 $0.00 $0.00 $0.00 Post Tax Salvage Value of Machine (H) $0.00 $0.00 $0.00 $356,586.66 Net Cash inflow (I = E + F+G+H) -$865,500.00 $352,988.58 $391,085.70 $655,125.72 PV Factor at 14% (J) 1.00000 0.87719 0.76947 0.67497 Present value at 12% (I*J) -$865,500.00 $309,639.11 $300,927.75 $442,191.20 NPV (Total) $187,258.05 Depreciation Calculation Cost of Machine $840,000.00 Installation Cost $16,500.00 Total machine Cost (a) $856,500.00 Depreciation Rate (b) 33.33% 44.45% 14.81% Depreciation (b*$856,500) $285,471.45 $380,714.25 $126,847.65 Post tax salvage value of machine Cost of Machine $856,500.00 Less: Depreciation for three years $793,033.35 Book Value (a) $63,466.65 Sale Proceeds (b) $552,000.00 Profit (c = b-a) $488,533.35 Tax on above at 40% (d) $195,413.34 Post tax cash flow from sale of machine (b-d) $356,586.66 Answer 1 Year 0 Net Cashflow $865,500.00 Answer 2 Year 1 $352,988.58 Year 2 $391,085.70 Year 3 $289,539.06 Answer 3 NPV $187,258