A Company is considering adding a robotic paint sprayer to its production line. The sprayer’sbase price...

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A Company is considering adding a robotic paint sprayer to itsproduction line. The sprayer’sbase price is $1,080,000, and itwould cost another $22,500 to install it. The machine falls intothe MACRS 3-year class (33%, 45%, 15% and 7%), and it would be soldafter 3 years for $605,000. The machine would require an increasein net working capital (inventory) of $15,500. The sprayer wouldnot change revenues, but it is expected to save the firm $380,000per year in before-tax operating costs, mainly labor. The company’smarginal tax rate is 35%.
a) What is the Year-0 cash flow?
b) What are the net operating cash flows in Years 1, 2, and3?
c) What is the non-operating Year-3 cash flow?
d) If the project’s cost of capital is 12%, should the machinebe purchased?

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3.7 Ratings (519 Votes)

a Year 0 cash flow 1118000b Net OCF in year 1 37433875Year 2 OCF 42064375Year 3 OCF 30488125c Non operating cash flow Working capital recovery See Answer

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A Company is considering adding a robotic paint sprayer to itsproduction line. The sprayer’sbase price is $1,080,000, and itwould cost another $22,500 to install it. The machine falls intothe MACRS 3-year class (33%, 45%, 15% and 7%), and it would be soldafter 3 years for $605,000. The machine would require an increasein net working capital (inventory) of $15,500. The sprayer wouldnot change revenues, but it is expected to save the firm $380,000per year in before-tax operating costs, mainly labor. The company’smarginal tax rate is 35%.a) What is the Year-0 cash flow?b) What are the net operating cash flows in Years 1, 2, and3?c) What is the non-operating Year-3 cash flow?d) If the project’s cost of capital is 12%, should the machinebe purchased?