New-Project Analysis The Campbell Company is considering adding a robotic paint
ID: 2778924 • Letter: N
Question
New-Project Analysis 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 $24,000 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 $568,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $383,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. 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. Year 1 $ Year 2 $ Year 3 $ 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 15 %, what is the NPV of the project? Round your answer to the nearest dollar. $
Explanation / Answer
INITIAL CASH OUTLAY=BASE PRICE OF SPRAYER+INSTALLATION COST+INCREASE IN NET WORKING CAPITAL=$ 8,40,000+$24,000+$18,000=$ 8,82,000
CALCULATION OF DEPRECIATION
YEAR 1= $ 8,40,000+$ 24,000*33.33%=$ 2,87,971
YEAR 2=$ 8,64,000-$ 2,87,971 * 44.45%=$ 2,56,045
YEAR 3=$ 3,19,984 *14.81%=$ 47,390
VALUE AFTER 3 YEARS OF DEPRECIATION=$ 2,72,594
SALES VALUE AFTER 3 YEARS=$ 5,68,000
CAPITAL PROFIT=$ 5,68,000-$ 2,72,594=$ 2,95,406
CAPITAL PROFIT AFTER TAX=$ 2,95,406-35%=$1,92,014
CALCULATION OF CASH FLOWS
CALCULATION OF NPV OF THE PROJECT
HENCE NPV OF THE PROJECT IS IN NEGATIVE I.E $ -8,858
YEAR 1($) 2($) 3($) SAVINGS (1) 3,83,000 3,83,000 3,83,000 DEPRECIATION (2) 2,87,971 2,56,045 47,390 PROFIT (3)= (1-2) 95,029 1,26,955 3,35,610 TAX @ 35% (4) 33,260 44,434 1,17,464 PROFIT AFTER TAX (5)=(3-4) 61,769 82,521 2,18,146 ADD:DEPRECIATION (6) 2,87,971 2,56,045 47,390 CASH INFLOW (5)+(6) 3,49,740 3,38,566 2,65,536