Reference no: EM133073511
eBook Problem Walk-Through
New-Project Analysis
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $830,000, and it would cost another $16,500 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 $632,000. The machine would require an increase in net working capital (inventory) of $20,000. The sprayer would not change revenues, but it is expected to save the firm $448,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations.
Answer the following:
a. What is the Year-0 net cash flow?
b. What are the net operating cash flows in Years 1, 2, and 3?
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Year 1:
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$
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Year 2:
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$
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Year 3:
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$
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c. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?
d. If the project's cost of capital is 13 %, what is the NPV of the project?
e. Should the machine be purchased?