Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,030,000, and it would cost another $22,500 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 $631,000. The machine would require an increase in net working capital (inventory) of $20,000. The sprayer would not change revenues, but it is expected to save the firm $434,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

1. What is the Year-0 net cash flow?

   $   

2. What are the net operating cash flows in Years 1, 2, and 3?

   Year 1:	$
   Year 2:	$
   Year 3:	$

3. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?

   $   

4. If the project's cost of capital is 11 %, what is the NPV of the project?

   $   

   Should the machine be purchased?

I only need help with part D!! I got the answers right to everything else.

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-1,030,000-22500-20000
-1072500	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	434,000	434,000	434,000
Less: Depreciation	350,798	467,836	155,875
Net Savings	83,202	-33,836	278,125
Less: Tax @30%	24,960.53	-10,150.88	83,437.43
Income after Tax	58,241.23	-23,685.38	194,687.33
Add: Depreciation	350,798	467,836	155,875
Cash Flow	409,039.48	444,150.88	350,562.58
Add: After tax salvage value			465,097.08
Recovery of Working capital			20,000
Cash Flow	409,039.48	444,150.88	835,659.65
Written down value	77,990
Sale price	631000
Gain on sale	553,010
Tax	165902.925
After tax salvage value	465097.075
c.NPV = Present value of cash inflows – present value of cash outflows
= 409039.48*PVF(11%, 1 year) + 444,150.88*PVF(11%, 2 years) + 835659.65*PVF(11%, 3 years) – 1072500
267513.9792
Yes, should be purchased (since NPV is positive)