Project Valuation (Capital Budgeting) The Campbell Company is considering adding
ID: 2630868 • Letter: P
Question
Project Valuation (Capital Budgeting)
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,040,000, 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 $527,000. The machine would require an increase in net working capital (inventory) of $8,500. The sprayer would not change revenues, but it is expected to save the firm $411,000 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 11 %, what is the NPV of the project? Round your answer to the nearest dollar.
E. Should the machine be purchased?
Please show basic calculations. Thank you
Explanation / Answer
Part A:
0 Year Net Cash Flow = -1040000-17000-8500 = -1065500
Part B:
Year1
Year2
Year3
Annual Savings
411000
411000
411000
Less Depreciation (On 1057000)
352298
469837
156542
Savings after Depreciation
58702
-58837
254458
Less Taxes (30%)
17611
-17651
76337
Savings after Taxes and Depreciation
41091
-76488
178121
Add Depreciation
352298
469837
156542
Operating Cash Flow
393389
393349
334663
Part C:
Additional Cash Flow in Year 3 = 527000 - (527000 - 78324)*(.30) + 8500
= 527000
Year1
Year2
Year3
Annual Savings
411000
411000
411000
Less Depreciation (On 1057000)
352298
469837
156542
Savings after Depreciation
58702
-58837
254458
Less Taxes (30%)
17611
-17651
76337
Savings after Taxes and Depreciation
41091
-76488
178121
Add Depreciation
352298
469837
156542
Operating Cash Flow
393389
393349
334663
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