The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2794040 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $830,000, and it would cost another $21,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $700,000. The MACRS rates for the first three years are 0.3333, 0.4445, 0.1481, and 0.0741. The machine would require an increase in net working capital (inventory) of $16,500. The sprayer would not change revenues, but it is expected to save the firm $426,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
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.
$
Explanation / Answer
Answer 1 Calculation of additional Year 3 Cash flow After tax salvage value $508,929 Return of working capital $16,500 Additional Year 3 Cash flow $525,429 Working Calculation of depreciation using MACRS 3 Year Class rates Year Depreciable Value Depreciation rates Depreciation 1 $851,500 0.3333 $283,805 2 $851,500 0.4445 $378,492 3 $851,500 0.1481 $126,107 Accumulated depreciation at the end of 3rd Year $788,404 Book value of robotic paint sprayer at the end of 3rd Year = Base price + Installation cost - Accumulated depreciation Book value of robotic paint sprayer at the end of 3rd Year = $830000 + $21500 - $788404 = $63096 Gain on sale of robotic paint sprayer at the end of 3rd Year = Sale value - book value = $700000 - $63096 = $636904 Tax on gain on sale of robotic paint sprayer = $636904 * 30% = $1,91,071 After tax salvage value of robotic paint sprayer = Sale value - Tax on gain = $700000 - $191071 = $508929 Answer 2 Calculation of NPV of the project Year 0 1 2 3 NPV Purchase cost sprayer -$830,000 Installation cost of sprayer -$21,500 Additional Working Capital -$16,500 Saving in operating costs $426,000 $426,000 $426,000 Tax on Saving in Operating cost -$127,800 -$127,800 -$127,800 After Tax salvage value $508,929 Return of working capital $16,500 Net Cash flow -$868,000 $298,200 $298,200 $823,629 Discount Factor @ 12% 1.00000 0.89286 0.79719 0.71178 Present Values -$868,000.00 $266,250.00 $237,723.21 $586,242.85 $222,216.07 NPV of the project = $222,216