Firm S is considering adding a robotic device to its production line. The device

Question

Firm S is considering adding a robotic device to its production line. The device base price is $1,038,000.00, and it would cost another $21,500.00 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 $563,000.00. The machine would require an increase in net working capital (inventory) of $7,500.00. The sprayer would not change revenues, but it is expected to save the firm $446,450.00 per year in before-tax operating costs, mainly labor. Firm S marginal tax rate is 30.00%.

If the project's cost of capital is 12.65%, what is the NPV of the project?

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Explanation / Answer

Year Cash Inflow PVIF(12.65%, 3 Years) Present Value 0 -1059500 1 -1059500.00 1 360015 0.887705 319587.12 2 360015 0.788021 283699.38 3 923015 0.69953 645676.68 NPV= 189463.18 Purchase Price 1038000 Sale Price 563000 Depreciation on Machine(Purchase - Sale Price) 475000 Depreciation per year(Total Depreciation/3) 158333.33 Income per year(Cost Saving-Depreciation per year) 288116.67 Tax charged per year @ 30 % 86435 Net Inflow for Year 0( -1038000- 21500) Net Inflow for Year 1 (446450-86435) Net Inflow for Year 2 (446450-86435) Net Inflow for Year 3 (446450-86435+563000)

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