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The Campbell Company is considering adding a robotic paint sprayer to its production line
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $850,000, and it would cost another $24,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $610,000. 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 $19,000. The sprayer would not change revenues, but it is expected to save the firm $337,000 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.
A. What is the Year-0 net cash flow?
B. What are the net operating cash flows in Years 1, 2, and 3?
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)?
D. If the project's cost of capital is 13%, what is the NPV of the project?
E. Should the machine be purchased? Yes or No
Expert Solution
| Computation of post tax salvage value | ||||||
| sales price = | $ 610,000 | |||||
| Book value = | $ 64,800 | |||||
| 874500*(1-0.3333-0.4445-0.1481) | ||||||
| Gain on sales= | $ 545,200 | |||||
| Tax on gain @25% | $ 136,300 | |||||
| Post tax salvage value | $ 473,700 | |||||
| (sales price- tax) | ||||||
| year | 0 | 1 | 2 | 3 | ||
| a | initial investment | (874,500) | ||||
| b | Working capital | (19,000) | ||||
| A | Initial investment | (893,500) | ||||
| operating cash flow | ||||||
| i | Annual saving | 337,000 | 337,000 | 337,000 | ||
| ii | Depreciation rate | 0.3333 | 0.4445 | 0.1481 | ||
| iii | depreciation | 291,471 | 388,715 | 129,513 | ||
| iv=i-iii | Profit before tax | 45,529 | (51,715) | 207,487 | ||
| v=iv*25% | Tax@ 25% | 11,382 | (12,929) | 51,872 | ||
| vi=iv-v | Profit after tax | 34,147 | (38,786) | 155,615 | ||
| B=vi+iii | operating cash flow | 325,618 | 349,929 | 285,128 | ||
| Terminal cash flow | ||||||
| i | Release of working capital = | 19,000 | ||||
| ii | Post tax salvage value | |||||
| (refer the working) | 473,700 | |||||
| C | NWC + salvage value | 492,700 | ||||
| D=A+B+C | Net cash flow | (893,500) | 325,618 | 349,929 | 777,828 | |
| D | PVIF @ 13% | 1.0000 | 0.8850 | 0.7831 | 0.6931 | |
| E=C*D | present value | (893,500) | 288,157 | 274,046 | 539,074 | 207,777 |
| Therefore NPV = | 207,777 | |||||
| Ans A) | Year 0 Cash flow | -893500 | ||||
| Ans B) | ||||||
| year -1 | 325,618 | |||||
| year -2 | 349,929 | |||||
| year -3 | 285,128 | |||||
| Ans C) | Additional cash flow | 492,700 | ||||
| Ans D) | NPV = | 207,777 | ||||
| Ans E) | Yes, Because NPV is positive |
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