The Campbell Company is considering adding a robotic paint sprayer to its produc

Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,021,000.00, and it would cost another $30,700.00 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 $586,500.00. The machine would require an increase in net working capital (inventory) of $8,100.00. The sprayer would not change revenues, but it is expected to save the firm $468,450.00 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 33.00%. d. If the project's cost of capital is 17.40%, what is the NPV of the project?

Explanation / Answer

The Campbell Company All Amounts in $ NPV of the Project Cash Outflows at year 0 Cost of sprayer including installation 1051700 Increase in Working Capital 8100 Total 1059800 Cash Inflows per year, from Years 1 to 3 Year 1 Year 2 Year 3 Savings in Pre-Tax Operating Costs 468450 468450 468450 Less : Depreciation 350532 467481 155757 Net Income before Taxes 117918 969.35 312693 Tax Impact @ 33% 38913.1 319.89 103189 Income Post Taxes 79005.3 649.46 209504 Add : Depreciation 350532 467481 155757 Cash Inflows 429537 468130 365261 Sale Price of Sprayer 586500 Cost of Capital 17.40% From this information, the NPV of the project works out to $ 153,493.11

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