New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The...

4.1 Ratings (585 Votes)

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-940,000-19,500-8,000
(967,500)	since outflow



b.Annual Cash Flows:

	Year 1	2	3
Savings in Cost	444,000	444,000	444,000
Less: Depreciation	319,801	426,498	142,102
Net Savings	124,199	17,502	301,898
Less: Tax @40%	49,679.46	7,000.90	120,759.22
Income after Tax	74,519.19	10,501.35	181,138.83
Add: Depreciation	319,801	426,498	142,102
Operating Cash Flow	394,320.54	436,999.10	323,240.78
Add: After tax salvage value			328,439.58
Recovery of Working capital			8,000
Additional cash flows			336,440
Annual Cash flows	394,320.54	436,999.10	659,680.36

Written down value	71,099
Sale price	500000
Gain on sale	428,901
Tax	171560.42
After tax salvage value	328439.58

c.NPV = Present value of cash inflows – present value of cash outflows
= 394320.54PVF(10%, 1 year) + 436999.10PVF(10%, 2 years) + 659680.36*PVF(10%, 3 years) – 967500
i.e. $	247,757.12

Yes, should be purchased (since NPV is positive)

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