Should the machine be purchased

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Reference no: EM133322610

Case: The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,070,000, and it would cost another $19,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $567,000. 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 $15,000. The sprayer would not change revenues, but it is expected to save the firm $364,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

Question 1: What is the Year-0 net cash flow?

Question 2: What are the net operating cash flows in Years 1, 2, and 3?

Question 3: What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)?

Question 4: If the project's cost of capital is 10%, what is the NPV of the project?

Question 5: Should the machine be purchased?

Reference no: EM133322610

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