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 $810,000, and it would cost another $17,000 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 $660,000. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change revenues, but it is expected to save the firm $412,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

What is the Year-0 net cash flow?
$   ________

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

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.
$   ________

If the project's cost of capital is 12 %, what is the NPV of the project? Round your answer to the nearest dollar.
$   ________   

Should the machine be purchased?
_________________

Explanation / Answer

Details Year 0 Year 1 Year 2 Year 3 MACRS Rate   33.33% 44.45% 14.81% Macvhine cost               827,000 Total depreciation=             765,719 Book value after 3 years                61,281 Resale value after 3 years             660,000 Capital Gain             598,719 NPV calculation Investment in Robot           (827,000) Investment in NWC             (13,000)                 13,000 Salvage               660,000 Pre Tax saving in operating cost             412,000             412,000               412,000 Less depreciation=          (275,639)           (367,602)            (122,479) Pretax income             136,361               44,399               289,521 Tax @40%             (54,544)             (17,759)            (115,809) Add Tax on capital Gain            (239,488) Post Tax Income (including salvage)             218,177               71,038               883,746 Add back depreciation             275,639             367,602               122,479 Net Cash flows (including NWC return)           (840,000)             493,817             438,639           1,019,225 PV factor @12%                          1               0.8929               0.7972                 0.7118 PV of cash flows           (840,000)             440,908             349,680               725,464 NPV = $   676,052.30            1 Year 0 net cash flow= $ (840,000.00) Year 1 Year 2 Year 3            2 Net Operating Cash flow $     493,816.5 $     438,639.1 $ 1,019,225.1 Additional return in year 3             433,512            3 NPV = $   676,052.30 As the NPV is positive the machine can be purchased.

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