Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,170,000, and it would cost another $21,500 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 $579,000. The machine would require an increase in net working capital (inventory) of $10,500. The sprayer would not change revenues, but it is expected to save the firm $498,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

What is the Year 0 net cash flow?
$

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	$

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.
$

If the project's cost of capital is 11 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

Should the machine be purchased?

Answer 1

		NET OPERATING CASH FLOW
		Year	0	1	2	3
	a	Base Price	$1,170,000
	b	Installation Cost	$21,500
	c=a+b	Total Asset Cost	$1,191,500
	d	Net working capital cash out flow	$10,500
	e=c+d	Net Cash Outflow	$1,202,000
	A	Depreciation Rate		33.33%	44.45%	14.81%	7.41%
	B=1191500*A	Annual Depreciation		$397,127	$529,622	$176,461
	C	Accumulated Depreciation		$397,127	$926,749	$1,103,210
	D=1191500-C	Book value at end of year		$794,373	$264,751	$88,290
	E=B*30%	Depreciation Tax Shield		$119,138	$158,887	$52,938
	F	Before tax annual savings		$498,000	$498,000	$498,000
	G=F*(1-0.3)	After tax annual savings		$348,600	$348,600	$348,600
	H=E+G	Operating Cash Flow		$467,738	$507,487	$401,538
		Additional year 3 cash flow:
	I	Release of net working capital				$10,500
	J	Salvage value of equipment				$579,000
	K	Book value of equipment				$88,290
	L=J-K	Gain on sale				$490,710
	M=L*0.3	Tax on Gain				$147,213
	P=J-M	After tax Cash flow on salvage				$431,787
	Q=I+P	Additional year 3 cash flow:				$442,287
		Year 0 net Cash Flow	($1,202,000)
		Net Operating cash Flow
		Year1	$467,738
		Year2	$507,487
		Year3	$401,538
		Additional Year 3 Cash Flow	$442,287
		Total Cash Flow in year 3	$843,825	(401538+442287)
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=11%=0.11
		N=Year of Cash Flow
	N	Year	0	1	2	3
	R	Cash Flow	($1,202,000)	$467,738	$507,487	$843,825	SUM
	PV=R/(1.11^N)	Present Value (PV) of Cash Flow:	($1,202,000)	$421,386	$411,887	$616,998	$248,271
		NPV of the Project	$248,271
		YES, THE MACHINE SHOULD BE PURCHASED
		NPV is Positive