#12 The Campbell Company is considering adding a robotic paint sprayer to its pr

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#12

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,180,000, and it would cost another $24,000 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 $544,000. The machine would require an increase in net working capital (inventory) of $19,500. The sprayer would not change revenues, but it is expected to save the firm $452,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

A.What is the Year-0 net cash flow?

B.What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.

C.What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.

D.If the project's cost of capital is 10 %, what is the NPV of the project? Round your answer to the nearest dollar.

Year 1 $   Year 2 $   Year 3 $  

Explanation / Answer

A) year 0 net cash flow would be:

cost of macine = 1,180,000, instalation charges = 24,000 , working capital = 19,500

= $ 1,223,500

B) Operating cash flows:

C) year 3 cash flow:

Remaining value at 3rd year is 89,216, selling price = 544,000

Capital gain = 454,784, capital gain tax = 136,435

Actual cash from sale = 544,000 - 136,435 = 407,565

Working capital = 19,500

Total cash flow at 3 rd year = 427,065

d) NPV at 10%

PV of cash flow = Cashflow/(1+i)^n, where i = 10% and n is the compounding factor

NPV = Present valu of cash flows - Intital investment

Year   Cost saving tax rate Depreciation rate Depreciation amount After tax cost saving Operating cash flow 0                           1           452,000             0.3 33.33%            401,293          316,400         717,693                           2           452,000             0.3 44.45%            535,178          316,400         851,578                           3           452,000             0.3 14.81%            178,312          316,400         494,712

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