Question

Problem Walk-Through еBook New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $980,000, and it would cost another $18,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $591,000. 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 $18,000. The sprayer would not change revenues, but it is expected to save the firm $323,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-0 net cash flow? $ b. What are the net operating cash flows in Years 1, 2, and 3? Year 1: $ Year 2: $ Year 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 11%, what is the NPV of the project? $ Should the machine be purchased? -Select tA

Answer 1

Time line		0	1	2	3
Cost of new machine		-998000
Initial working capital		-18000
=a. Initial Investment outlay		-1016000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			323000	323000	323000
-Depreciation	=Cost of machine*MACR%		-332633.4	-443611	-147803.8	73951.8	=Salvage Value
=Pretax cash flows			-9633.4	-120611	175196.2
-taxes	=(Pretax cash flows)*(1-tax)		-7225.05	-90458.25	131397.15
+Depreciation			332633.4	443611	147803.8
=b. after tax operating cash flow			325408.35	353152.75	279200.95
reversal of working capital					18000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				443250
+Tax shield on salvage book value	=Salvage value * tax rate				18487.95
=c. Terminal year after tax cash flows					479737.95
Total Cash flow for the period		-1016000	325408.35	353152.75	758938.9
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-1016000	293160.6757	286626.6943	554929.5826
d. NPV=	Sum of discounted CF=	118716.95

Purchase machine as NPV is positive