Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $920,000, 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 $500,000. 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 $15,500. The sprayer would not change revenues, but it is expected to save the firm $304,000 per year in before tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. a. What is the Year-O cash flow? b. What are the cash flows in Years 1, 2, and 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 12%, what is the NPV?

Answer 1

Given,

Base price = $ 920000

Installation cost = $ 20000

Net working capital = $ 15500

Initial cost = base price + installation cost

= $ 920000 + $ 20000 = $ 940000

Sale value = $ 500000

Savings in operating costs = $ 304000

Marginal tax rate (t) = 25% or 0.25

Solution :-

Year-O Cash Flow = base price & Installation Cost t ot net working Capital - $920000 + $20000 + $ 15500 = $955500 b calcular Calculation of depreciation tax shield & A B C D =BXC ESD Xt(0.25) Years Initial MACRS Depreciation Depreciation Cost I rates tax Shield 940000 0.3333313302 78375.5 940000 10.4445 417830 I 104457.5 940000 60.1481139214 134803.5 87046

Year 1 cash flows - Savings in Operating (1-t) + Depreciation costs tax Shield (year 1) = $304000 (1-0,25) + $78325.5 = $304000 (0.75) + $78325.5 = $ 728000 + $78325.5=$306375.50 year a cash flows - Savings in Operating (1-t) + Depreciation costs tax shield (Year 2) $304000 (1 - 0.25 + $ 104457.5. & $304000 (0.75) + $ 104457.5 - $228000 + $ 104457.5 - $332457.50

Year 3 Cash Flows = Savings in Operating (1-t) + Depreciation Costs tax shield (Year 3) = $ 304000 (1-0.25) + $ 34803.5 = $304000 (0.75 + $34803.5 - $228000 + $34803.5 - $262803.50 (C) Additional Year 3 Cash Flow - sale – sale – (Initial - Total Itt Net Value Value Cost Depreciation) Working Capital Recovery = 500000 - 500000 - (940000 - 870346)] 0.35 + 15500 = 500000 - [500000 - 69654] 0.25 + 15500 = 500000 - [1430346] 0.25 + 15500 - sooooo – 107586.50 t Issoo. $ 407913.50

(d) Cost of Capital = 12% LA Years B Cash years Chois C PU factor @ 12% D = BAC Pu of Cash I flows @ 12% 306325.50 0.89285714 273504.9098 332457.50 10.797/9388 2650 33.08436 3 262803.50 0.71178025 187058.34093 3 407913.50 0.71178025 290344.77301 (Additional Cash Flows) 81015941.11 رخام INPU=PV of Cash Flows - Year-O Cash Flow = $1015941.12 - $955500 = $ 60441,1)