The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 3199650 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,069,000.00, and it would cost another $30,800.00 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 $607,000.00. The machine would require an increase in net working capital (inventory) of $8,800.00. The sprayer would not change revenues, but it is expected to save the firm $342,450.00 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40.00%.
If the project's cost of capital is 11.40%, what is the NPV of the project?
Explanation / Answer
1. The Nett Cost of the Sprayer Cost Price 1069000 Installation Cost 39800 1108800 Increase in Working Capital 8800 Sub Total 1117600 . 2. Savings on operating Cost per year 342450 Less Tax at 40% 136980 Nett Savings on operating per year 205470 3. Depreciation on machine cost = 1108800 Tax Saving 1st Year 33.33% 369563 147825 2nd Year 44.45% 492862 197145 3rd Year 14.81% 164213 65685 4th Year 7.41% 82162 32865 4. After 3 years sprayer is sold Salvage Value 65000 Book value at end of 3rd year 82162 Loss -17162 Tax value on Salvage 40% -6865 Increase in working Capital 8800 Final Cash flow in -15227 0 1 2 3 Cash flow statement Year 0 Year 1 Year 2 Year 3 Cash Outlay Sprayer Cost 1108800 Increase in working Capuital 8800 Operating costs cash flows Savings on operations 205470 205470 205470 Depreciation tax savings 147825 197145 65685 Nett Cash flow 353295 402615 271155 Final Year Cash Flow -15227 Total Cash fllow 1117600 353295 402615 255929 NPV @11.4% 1117600 317141 255554 171838 Cash flow out 1117600 Cash Flow in 744533 NPV of the project 373067