Problem 11-06

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, and it would cost another $23,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $665,000. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change revenues, but it is expected to save the firm $476,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

PART 1. What is the Year 0 net cash flow?

$_____

PART 2. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1= $_______

Year 2= $_______

Year 3= $_______

PART 3. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.

$______

PART 4. If the project's cost of capital is 11 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

$______

Should the machine be purchased? Yes or No?