Question

# New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line....

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is \$930,000, and it would cost another \$22,000 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 \$502,000. The machine would require an increase in net working capital (inventory) of \$16,500. The sprayer would not change revenues, but it is expected to save the firm \$470,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

1. What is the Year 0 net cash flow?
\$

2. 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 \$

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.
\$

4. If the project's cost of capital is 13 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
\$

Should the machine be purchased?
-Select-YesNo

Initial Investment = Base Price + Installation Cost
Initial Investment = \$930,000 + \$22,000
Initial Investment = \$952,000

Useful Life = 3 years

Depreciation Year 1 = 33.33% * \$952,000
Depreciation Year 1 = \$317,301.60

Depreciation Year 2 = 44.45% * \$952,000
Depreciation Year 2 = \$423,164.00

Depreciation Year 3 = 14.81% * \$952,000
Depreciation Year 3 = \$140,991.20

Book Value at the end of Year 3 = \$952,000.00 - \$317,301.60 - \$423,164.00 - \$140,991.20
Book Value at the end of Year 3 = \$70,543.20

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = \$502,000.00 - (\$502,000.00 - \$70,543.20) * 0.35
After-tax Salvage Value = \$350,990.12

Initial Investment in NWC = \$16,500

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -\$952,000 - \$16,500
Net Cash Flows = -\$968,500

Year 1:

Operating Cash Flow = Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = \$470,000 * (1 - 0.35) + 0.35 * \$317,301.60
Operating Cash Flow = \$416,555.56

Net Cash Flows = Operating Cash Flow
Net Cash Flows = \$416,555.56

Year 2:

Operating Cash Flow = Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = \$470,000 * (1 - 0.35) + 0.35 * \$423,164
Operating Cash Flow = \$453,607.40

Net Cash Flows = Operating Cash Flow
Net Cash Flows = \$453,607.40

Year 3:

Operating Cash Flow = Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = \$470,000 * (1 - 0.35) + 0.35 * \$140,991.20
Operating Cash Flow = \$354,846.92

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = \$354,846.92 + \$16,500 + \$350,990.12
Net Cash Flows = \$722,337.04

Cost of Capital = 13%

NPV = -\$968,500 + \$416,555.56/1.13 + \$453,607.40/1.13^2 + \$722,337.04/1.13^3
NPV = \$255,990

Yes, the machine should be purchased.

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