Question

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,050,000, and it would cost another $17,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $630,000. 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 $19,000. 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-0 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 15%, what is the NPV of the project? $ Should the machine be purchased? -Select-

Answer 1

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ENG 04:44 21-07-2020 F 99+ 36 WH103 . WA WB WC WD WE WE WG WH 80 0 1 2 3 YEAR ------- >>> [1050000+ 17000] 81 COST OF ASSET WORKING CAPITAL SAVINGS IN COST -1067000 -19000 82 83 389000.00 389000.00 389000.00 474281.50 84 DEPRECIATION 355631.10 158022.70 85 INCOME BEFORE TAX 33368.90 230977.30 86 25% TAX NET INCOME 8342.23 25026.68 -85281.50 -21320.38 -63961.13 87 88 355631.10 474281.50 410320.38 -1086000 380657.78 89 90 DEPRECIATION OPERATING CASH FLOW RECOVERY OF WORKING CAPITAL AFTER TAX SALVAGE VALUE OF ASSET NET CASH FLOW PV FACTOR AT 15% PV OF CFAT 91 57744.33 173232.98 158022.70 331255.68 19000.00 492266.18 (SEE NOTE) (A-B) 842521.85 0.6575 553971.79 109239.71 7 NPV -1086000 380657.78 92 93 1 0.8696 410320.38 0.7561 310261.15 94 -1086000 331006.76 95 96 a YEAR O CASH FLOW -1086000 97 b OPERATING CASH FLOW 98 99 YEAR 1 CASH FLOW YEAR 2 CASH FLOW YEAR 3 CASH FLOW 380658 410320 331256 511266 [ RECOVERY WORKING CAPITAL + AFTER TAX SALVAGE] 109240 100 C ADDITIONAL CASH FLOW YEAR 3 NPV 101 d 102 103 yes, AS NPV IS POSITIVE, IT SHOULD BE PURCHASED HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT

ENG 04:45 21-07-2020 99+ 36 WL97 WI WJ WK WL WM WN 80 1067000 COST OF ASSET DEPRECIATION 81 YEAR 82 83 1 RATE 33.33% 44.45% DEPRECIATION BOOK VALUE 355631.10 711368.90 474281.50 237087.40 84 2 85 3 14.81% 158022.70 79064.70 86 4 7.41% 79064.70 0.00 87 88 NOTE 630000.00 A 89 90 91 (A-B) 92 93 SALVAGE VALUE BOOK VALUE PROFIT ON SALE 79064.70 550935.30 137733.83 B 492266.18 A-B TAX ON PROFIT AFTER TAX SALVAGE VALUE 94 95 96 97 98 99 100 101 102 103 HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT +