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 $840,000, and it would cost another $25,000 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 $590,000. The machine would require an increase in net working capital (inventory) of $13,500. The sprayer would not change revenues, but it is expected to save the firm $394,000 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.

year 1 ___________

year 2 ___________

year 3 ___________

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 15 %, what is the NPV of the project? Round your answer to the nearest dollar.

$___________

Explanation / Answer

a

year             BBV          MACR            Depreciation          Ending BV     

1                865000       33.33%             288305                    576695

2.               576695       44.45%             256341                    320354           

3                320354       14.81%              47444                     252910    

Calculation of net operating cash flows

Year          PBD             Depreciaiton            PAD       Tax @v30%     PAT              Dep                 CFAT

(1)             (2)                    (3)                        (4)=2-3       (5)= 4 x 30%    (6)=4-5        (7)             (8) = 6+7

1            394,000           288305                  105695            31709          73987        288305           362292

2            394,000           256341                   137659           41298          96361        256341           352702

3            394000            47444                     346556         103967        242589      47444             290033

Year 0 Net Cash Flows : $ 840,000+Installation cost 25,000 + Net Working capital + 13,500= $ 878,500

b: Net Operating cash folws for 3 years (from abvoe table):

Year 1 - $ 362,292; Year 2 - $ 352,702; Year 3 - $ 290033

c. Year 3 additional cash flows= Salvage value 590,000+ Return of working capital $ 13,500 = $ 603,500

Total Cashflows in Year 3 $ 290033+$ 603500=$ 893533

d. Calculation of Net present Value :

       Year           CFAT($)         PVF @ 15%            DCFAT ($)

         1              362292              0.869                   314832

          2             352702              0.756                   266643

          3             893533              0.658                  587944

                         Total DCFAT                             1169419

                         Less Initial Cash outflows           878500

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