Question

cek 6: Homework The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $910,000, and it would cost another $20,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $489,000. 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 $389,000 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-O 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 10%, what is the NPV of the project? Should the machine be purchased? -Selecs Show all X Yes 11:09 AM Hamzeh week 2....docx

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-910000-20000-18000
-948000	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	389,000	389,000	389,000
Less: Depreciation	309,969	413,385	137,733
Net Savings	79,031	-24,385	251,267
Less: Tax @25%	19,757.75	-6,096.25	62,816.75
Income after Tax	59,273.25	-18,288.75	188,450.25
Add: Depreciation	309,969	413,385	137,733
Operating Cash flow	369,242.25	395,096.25	326,183.25
Add: After tax salvage value			383,978.25
Recovery of Working capital			18,000
Cash Flow	369,242.25	395,096.25	728,161.50
Written down value	68,913
Sale price	489000
Gain on sale	420,087
Tax	105021.75
After tax salvage value	383978.25
c.NPV = Present value of cash inflows – present value of cash outflows
= 369242.25*PVF(10%, 1 year) + 395096.25*PVF(10%, 2 years) + 728161.50*PVF(10%, 3 years) – 948000
261279.1116
Yes, should be purchased (since NPV is positive)