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%.
Year 1 | $ |
Year 2 | $ |
Year 3 | $ |
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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