Question

Problem 11-06 New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,010,000, and it would cost another $17,500 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 $677,000. 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 $378,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

1. What is the Year 0 net cash flow? $_________
2. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Year 1	$______
   Year 2	$______
   Year 3	$______

3. 
   
4. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar. $_________
5. If the project's cost of capital is 10 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ ___________
   Should the machine be purchased? ________( Yes / No )

Problem 12-02 AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $7.0 million in 2016 to $8.05 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 7%, and the forecasted payout ratio is 60%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar. $__________

Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. Broussard's capital intensity ratio (A₀*/S₀) is _______ ( higher than / lower than / equal to ) than the otherwise identical firm; therefore, Broussard is ________ ( less / more / the same ) capital intensive - it would require __________ (a smaller / a larger / the same ) increase in total assets to support the increase in sales.

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $677,000.00 $76,137.75 $600,862.25 $378,000.00 $342,465.75 $35,534.25 $10,660.28 $24,873.98 $342,465.75 $367,339.73 less: 3 $378,000.00 $152,172.75 $225,827.25 $67,748.18 $158,079.08 $152,172.75 $310,251.83 $378,000.00 $456,723.75 $78,723.75 -$23,617.13 -$55,106.63 $456,723.75 $401,617.13 add: salvage value less: tax on gain after tax salvage value $677,000.00 $180,258.68 $496,741.33 YEAR Savings depreciation EBT tax @30% EAT depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 10% PRESENT VALUE NPV -$1,027,500.00 -$20,000.00 $20,000.00 -$1,047,500.00 $367,339.73 0.90909 $333,945.20 $401,617.13 0.82645 $331,914.98 $496,741.33 $826,993.15 0.75131 $621,332.19 year 0 cash flow = year 1 year 2 Iyear 3 Additional cash flow NPV yes should be purchased -$1,047,500.00 $239,692 -$1,047,500.00 $367,340 $401,617 $310,252 $516,741.33 $239,692