Question

Problem 11-06
New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $900,000, and it would cost another $18,500 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 $591,000. The machine would require an increase in networking capital (inventory) of $18,500. The sprayer would not change revenues, but it is expected to save the firm $486,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

1. What is the Year 0 net cash flow?
   $
2. 
   
3. 
   
4. 
   
5. 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	$

6. 
   
7. 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.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 14 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
    $
    
    Should the machine be purchased?

Answer 1

YEAR Savings depreciation EBT tax @40% after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $591,000.00 $68,060.85 $522,939.15 $486,000.00 $306,136.05 $179,863.95 $71,945.58 $107,918.37 $306,136.05 $414,054.42 less: 3 $486,000.00 $136,029.85 $349,970.15 $139,988.06 $209,982.09 $136,029.85 $346,011.94 $486,000.00 $408,273.25 $77,726.75 $31,090.70 $46,636.05 $408,273.25 $454,909.30 EAT add: salvage value less: tax on gain after tax salvage value $591,000.00 $209,175.66 $381,824.34 $918,500.00 -$18,500.00 $18,500.00 -$937,000.00 depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 14% PRESENT VALUE NPV Yes year 0 cash flow= year 1 year 2 Iyear 3 Additional cash flow Yes $414,054.42 0.87719 $363,205.63 $454,909.30 0.76947 $350,037.93 $381,824.34 $746,336.28 0.67497 $503,755.73 $937,000.00 $279,999.30 $937,000 $414,054 $454,909 $746,336 $400,324