The Campbell Company is considering adding a robotic paint sprayer to its produc
ID: 2634360 • Letter: T
Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $850,000, and it would cost another $22,500 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 $529,000. 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 $428,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
Year 1 $ ________ Year 2 $ ________ Year 3 $ ________Explanation / Answer
1. Year 0 net cashflow = base price + installation cost + net working capital = 850,000 + 22,500 + 8,500 = 881,000
Answer: Year 1 net cashflow = $ 881,000
2. Initial book value = 850,000 + 22,500 = 872,500
Year 1 depreciation = 872,500 * 33.33% = 290,804.25
Year 1 net operating cashflow = cost saving * (1-tax rate) + depreciation * tax rate = 428,000 * (1-30%) + 290,804.25 * 30% = 386,841
Year 2 depreciation = 872,500 * 44.45% = 387,826.25
Year 2 net operating cashflow = cost saving * (1-tax rate) + depreciation * tax rate = 428,000 * (1-30%) + 387,826.25 * 30% = 415,948
Year 3 depreciation = 872,500 * 14.81% = 129,217.25
Year 3 net operating cashflow = cost saving * (1-tax rate) + depreciation * tax rate = 428,000 * (1-30%) + 129,217.25 * 30% = 338,365
Answer: Year 1 net operating cashflow = $ 386,841
Year 2 net operating cashflow = $ 415,948
Year 3 net operating cashflow = $ 338,365
3. Book value after year 3 = (1-33.33%-44.45%-14.81%) * 872,500 = 64,652.25
Profit on sale of asset at 529,000 = 529,000 - 64,652.25 = 464,347.75
After tax cashflow from sale of asset = sale value - tax on profit = 529,000 - 464,347.75 * 30% = 389,695.68
Return of working capital = 8,500
So total additional cashflow in year 3 = 389,695.68 + 8,500 = 398,196
Answer: Total additional cashflow in year 3 = $ 398,196
11. NPV = year 1 cashflow / (1+15%) + year 2 cashflow / (1+15%)^2 + year 3 cashflow / (1+15%)^3 - year 0 cashflow = 386,841.28 / 1.15 + 415,947.88 / 1.15^2 + 338,365.18 / 1.15^3 + 398,195.68 / 1.15^3 - 881,000 = 254,201
As the NPV is positive, the machine should be purchased.
Answer: NPV = $ 254,201. The machine should be purchased.
Hope this helped ! Let me know in case of any queries.
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