The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's...

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The Campbell Company is considering adding a robotic paintsprayer to its production line. The sprayer's base price is$1,180,000, and it would cost another $20,500 to install it. Themachine falls into the MACRS 3-year class (the applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $534,000. The machine would requirean increase in net working capital (inventory) of $17,000. Thesprayer would not change revenues, but it is expected to save thefirm $476,000 per year in before-tax operating costs, mainly labor.Campbell's marginal tax rate is 40%.
What are the net operating cash flows in Years 1, 2, and 3?
What is the additional Year 3 cash flow (i.e, the after-taxsalvage and the return of working capital)?
If the project's cost of capital is 12 %, what is the NPV of theproject?

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3.7 Ratings (372 Votes)

Initial Investment Base Price Installation Cost Initial Investment 1180000 20500 Initial Investment 1200500 Useful Life 3 years Depreciation Year 1 3333 1200500 Depreciation Year 1 40012665 Depreciation Year 2 4445 1200500 Depreciation Year 2 53362225 Depreciation Year 3 See Answer

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The Campbell Company is considering adding a robotic paintsprayer to its production line. The sprayer's base price is$1,180,000, and it would cost another $20,500 to install it. Themachine falls into the MACRS 3-year class (the applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $534,000. The machine would requirean increase in net working capital (inventory) of $17,000. Thesprayer would not change revenues, but it is expected to save thefirm $476,000 per year in before-tax operating costs, mainly labor.Campbell's marginal tax rate is 40%.What are the net operating cash flows in Years 1, 2, and 3?What is the additional Year 3 cash flow (i.e, the after-taxsalvage and the return of working capital)?If the project's cost of capital is 12 %, what is the NPV of theproject?