Could you show the work needed to get from the problem to the answers for proble
ID: 2798524 • Letter: C
Question
Could you show the work needed to get from the problem to the answers for problem 11-6 in both excel format and by using a financial calculator (BA II Plus)?
(11-6) New-Project Analysis depreciation rates are 33.33%, 44.45%, 14.81%, and 7,419%, as discussed in appeluun tua. The company's WACC is 10%, and its tax rate is 40%. a. What would the depreciation expense be each year under each method? b. Which depreciation method would produce the higher NPV, and how much higher would it be? c. Why might Wendy's boss prefer straight-line depreciation? The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. a. What is the Year o net cash flow? b. What are the net operating cash flows in Years 1, 2, and 3? c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? d. If the project's cost of capital is 12%, should the machine be purchased?Explanation / Answer
11-6:
Since NPV is positive, the machine should be purchased.
Requirement a: Calculation of Year 0 Net Cash Flow: Base Price -1080000 Installation Costs -22500 Net Working Capital Requirement -15500 Net Cash Flow -1118000 Requirement b: Calculation of Net Operating Cash Flow : Particulars Year 1 Year 2 Year 3 Savings in Operating Costs 380000 380000 380000 Less: Depreciation 367463.25 490061.25 163280.25 Incremental Profit before taxes 12536.75 -110061.25 216719.75 Less: Taxes 4387.8625 -38521.4375 75851.9125 Incremental Profit after taxes 8148.8875 -71539.8125 140867.8375 Add: Depreciation 367463.25 490061.25 163280.25 Net Operating Cash Flow after taxes 375612 418521 304148 Requirement c: Calculation of Additional Year 3 Cash Flow: Salvage Value 605000 Less: Taxes (605000 - (1080000+22500)(1-0.3333-0.4445-0.1481))*35% 183156.6625 After Tax Salvage Value 421843.3375 Recovery of net working capital 15500 Additional Year 3 Cash Flow 437343