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 $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change reveues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

Explanation / Answer

Annual MACRS Saving Tax Savings Casinflow Year Savings Depreciation Before Tax at 35% After Tax after tax 0 0 0 0 0 1 380000 359964 20036 7012.6 13023.4 372987.4 2 380000 481140 -101140 -35399 -65741 415399 3 380000 159948 220052 77018.2 143033.8 302981.8 Operating Initial Solvage Working Total pv factor Present Year Cashflows Invistment Recovery Capital Cashflows at 10% Value 0 0 -1102500 -15500 -1118000 1 -1118000 1 372987 372987.4 0.909091 339079.5 2 415399 415399 0.826446 343305 3 302982 605000 907981.8 0.751315 682180.2 total 1091368 -1102500 605000 -15500 578368.2 246564.6 Required rate of return is not provided in the question. I assume it 10% to find out present Value of the investment. Formula Used: After tax cashflows = Savings after tax + Depreciation pv factor = 1/1.1^n, where n = 0,1,2,3 and Present value = Cashinflows x pv factor

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