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New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The...

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Finance

New-Project Analysis

The Campbell Company is considering adding a robotic paintsprayer to its production line. The sprayer's base price is$1,100,000, and it would cost another $17,500 to install it. Themachine falls into the MACRS 3-year class (the applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $565,000. The machine would requirean increase in net working capital (inventory) of $15,000. Thesprayer would not change revenues, but it is expected to save thefirm $481,000 per year in before-tax operating costs, mainly labor.Campbell's marginal tax rate is 35%.

  1. What is the Year 0 net cash flow?
    $



  5. What are the net operating cash flows in Years 1, 2, and 3? Donot round intermediate calculations. Round your answers to thenearest dollar.
    Year 1$
    Year 2$
    Year 3$

  7. What is the additional Year 3 cash flow (i.e, the after-taxsalvage and the return of working capital)? Do not roundintermediate calculations. Round your answer to the nearestdollar.
    $



  11. If the project's cost of capital is 15 %, what is the NPV ofthe project? Do not round intermediate calculations. Round youranswer to the nearest dollar.
    $

    Should the machine be purchased?
    -Select-YesNo

Answer & Explanation Solved by verified expert
3.5 Ratings (306 Votes)

Time line 0 1 2 3
Cost of new machine -1117500
Initial working capital -15000
=Initial Investment outlay -1132500
3 years MACR rate 33.33% 44.45% 14.81% 7.41%
Savings 481000 481000 481000
-Depreciation =Cost of machine*MACR% -372462.75 -496728.8 -165501.8 82806.75 =Salvage Value
=Pretax cash flows 108537.25 -15728.75 315498.25
-taxes =(Pretax cash flows)*(1-tax) 70549.2125 -10223.69 205073.86
+Depreciation 372462.75 496728.75 165501.75
=after tax operating cash flow 443012 486505 370576
reversal of working capital 15000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 367250
+Tax shield on salvage book value =Salvage value * tax rate 28982.363 additional cash flow= 367250+28982=396232
=Terminal year after tax cash flows 411232.36
Total Cash flow for the period -1132500 443011.9625 486505.06 781807.98
Discount factor= (1+discount rate)^corresponding period 1 1.15 1.3225 1.520875
Discounted CF= Cashflow/discount factor -1132500 385227.7935 367867.72 514051.43
NPV= Sum of discounted CF= 134647

purchase as NPV is positive
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