Question

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $820,000, and it would cost another $21,000 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 $636,000. The machine would require an increase in net working capital (inventory) of $12,500. The sprayer would not change revenues, but it is expected to save the firm $461,000 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. a. What is the Year-O net cash flow? $ - 1042500 b. What are the net operating cash flows in Years 1, 2, and 3? 425690 Year 1: $ Year 2: $ Year 3: $ 460051 368463 C. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? 480957 d. If the project's cost of capital is 11 %, what is the NPV of the project? $ 335217 Should the machine be purchased?

Answer 1

3 after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $636,000.00 $62,318.10 $573,681.90 less: $461,000.00 $280,305.30 $180,694.70 $54,208.41 $126,486.29 $280,305.30 $406,791.59 $461,000.00 $373,824.50 $87,175.50 $26,152.65 $61,022.85 $373,824.50 $434,847.35 $461,000.00 $124,552.10 $336,447.90 $100,934.37 $235,513.53 $124,552.10 $360,065.63 add: salvage value less: tax on gain after tax salvage value $636,000.00 $172,104.57 $463,895.43 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 @ 11% PRESENT VALUE NPV -$841,000.00 -$12,500.00 $12,500.00 -$853,500.00 $406,791.59 0.90090 $366,478.91 $434,847.35 0.81162 $352,931.86 $463,895.43 $836,461.06 0.73119 $611,613.12 -$853,500.00 $477,523.89 year 0 cash flow = year 1 year 2 year 3 Additional cash flow NPV -$853,500 $406,792 $434,847 $360,066 $476,395 $477,523.89 lyes