Question

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. 
   
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 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

Answer 1

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.