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Assume that you work for Federal Express (FDX) and are evaluating the purchase of a robot to be used in the Memphis terminal. The base price for the robot is $145,000 and it would cost an additional $25,000 to modify it for FDX's special use. The robot will be placed on the MACRS 3- year class life and would be sold after 3 years for $70,000. The robot would require an $7.000 increase in net operating working capital (spare parts inventory) The increase in net operating working capital will be recovered fully when the robot is salvaged. The project would have no effect on revenues, but is expected to save FDX $58,000 per year in before-tax labor costs. FDX's marginal federal plus state income tax rate in Tennessee is 27.5%. Assuming a 12%, WACC for FDX, should the robot be purchase and installed? Estimate the Initial Cash Flows, Operating Cash Flows and Terminal Cash Flows, and determine the NPV for the project and the IRR for the project. Please set this problem up in your own Excel Spreadsheet and upload it to drop box. Your spread sheet should us the following format: Depreciation Schedule:3-year class life, assuming half year convention Initial Basis 170,000 Year Dep Rate Depreciation Adj Basis 0.33 0.45 0.15 0.07 1 2 3 Initial Cash Flows at i=0: CAPEX is total initial capital cost and ANOWC is the net increase ir working capital Price $145,000 Modification 25,000 CAPEX $170,000 NOWC -7,000 Initial investment outlay $177,000 Robor's operating cash flows Year CFBT Depreciation Taxable Income Taxesa 27.5% 1 58,000 2 58,000 13.500 5.087.50 3 58,000 CFAT 37.477.30 63,087.50 49,062.50 *Taxable income in year 2 is negative, resulting in a negative tax; however, project Operating losses in year 2 are offset by other FDX income. Robot's Terminal cash flow's at t = 3: Sabage value Tax on sa bage value $70,000 Recover' of NOWC 7,000 **Tax on Salvage =(Salvage value-Adjusted Basis)0 275=($70,000 - $11.900) 275= $15.977,50 NPV-$2.968.49 IRR= 12.87 Should your firm purchase or reject the new machine

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