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 $23,000 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 $677,000. The machine would require an increase in net working capital (inventory) of $10,000. The sprayer would not change revenues, but it is expected to save the firm $480,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. What is the Year-0 net cash flow? $ 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 $ 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. $ If the project's cost of capital is 14 %, what is the NPV of the project? Round your answer to the nearest dollar. $ Should the machine be purchased?

Explanation / Answer

The yaear zero net caash outflow = 1,080,000(base price) + 23,000 (installation) + 10,000 (Increase in WC) = 1,113,000

Since these are all outflow, the net Year 0 cash flow = -1,113,000

The Cash flows for year 1 ,2 amd 3 are:

The NPV at 14% cost of capital is as follows

Based on the NPV (Positive), the project should be selected

Year 0 1 2 3 Initial Cost -1080000 Installation costs -23000 Increase in WC -10000 Costs savings 480000 480000 480000 Depreciation -359964 -480060 -159948 Profit before tax 120036 -60 320052 Tax 48014.4 0 128020.8 Profit after tax 72021.6 -60 192031.2 Add back depreciation 359964 480060 159948 return of WC 10000 After tax salavage value 438211.2 Operating cash flow 431985.6 480000 800190.4

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