Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $990,000, and it would cost another $19,000 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 $542,000. 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 $397,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

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 12 %, 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-
12. Yes
13. No

Answer 1

a) Net cash flows in year 0 :-

Particulars	Amount
Base price of machine	$990,000
Add-Installation cost	19000
Total cost of machine	$1,009,000
Add-Investment in Working capital	$19,000
Net cash flows in year 0	$1,028,000

f) Calculation of the net operating cash inflows in year 1,2,3.

Calculation of the depreciation:-

Total cost of machine = $990,000 + 19,000 = $ 1,009,000

years	MACR's rates	Depreciation	Book value of machine
0			$1,009,000
1	33.33%	$336,299.70	$672,700.30
2	44.45%	$448,500.50	$224,199.80
3	14.81%	$149,432.90	$74,766.90

Operating cash flows :-

particulars	year 1	year 2	year 3
Savings in OC	$397,000	$397,000	$397,000
Less-Depreciation	$336,299.70	$448,500.50	$149,432.90
profit/(loss) before tax	$60,700.30	($51,500.50)	$247,567.10
less-tax/(taxshield)@30%	$18,210.09	($15,450.15)	$74,270.13
Profit after tax	$42,490.21	($36,050.35)	$173,296.97
Add-Depreciation	$336,299.70	$448,500.50	$149,432.90
Net operating cash flows	$378,789.91	$412,450.15	$322,729.87
Net operating cash flows(Round off nearest dollars)	$378,790	$412,450	$322,730

h) Calculation of the additional cash flows in year 3 :-

Additional cash flows in year 3 = after tax salvage value + recovery of working capital

After tax salvage value :-

Sale value of machine in year 3	542,000
less-book value	$74,766.90
gain on machine	$467,233.10
tax on gain @30%	$140,169.93
After tax salvage value	$401,830

Additional cash flows in year 3 = after tax salvage value + recovery of working capital = $ 401,830 +19,000 = $420,830

m) NPV:-

years	initial investment	Operating cash flows	Additional cash inflows	total Cf	PVF@12%	PV of CF
0	-1028000			-1028000	1	-1028000
1		$378,789.91		378790	0.892857	338205.3
2		$412,450.15		412450	0.797194	328802.7
3		$322,729.87	$420,830	743560	0.71178	529251.3
NPV	168259.3
NPV(nearest Dollar)	168,259

NPV is positive.So, we purchased the machine