Problem 11-6 New-Project Analysis The Campbell Company is considering adding a r
ID: 2766242 • Letter: P
Question
Problem 11-6
New-Project Analysis
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $900,000, and it would cost another $17,500 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 $588,000. The machine would require an increase in net working capital (inventory) of $14,500. The sprayer would not change revenues, but it is expected to save the firm $429,000 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 14 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
Should the machine be purchased?
-Select-
Yes
No
Year 1 $ Year 2 $ Year 3 $Explanation / Answer
Year 0 net cash flow = Cost of asset + Installation cost + Additional working capital = $ 900,000 + $ 17,500 + $ 14,500 = $ ( 932,000)
Net operating cash flows:
The additional year-3 cash flow is $ 326,508.
NPV at 14%:
Present value of cash inflows = $ 379,721 x 0.877 + $ 420,532 x 0.769 + $ (311,753 + 326,508) x 0.675 = $ 1,087,230
NPV = $1,087,230 - $ 932,000 = $ 155,230
Yes, the machine should be purchased.
Year 1 $ 379,721 Year 2 $ 420,532 Year 3 $ 311,753