Problem 13-06 (New-Project Analysis)

eBook Problem Walk-Through

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $860,000, and it would cost another $21,000 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 $565,000. The machine would require an increase in net working capital (inventory) of $13,500. The sprayer would not change revenues, but it is expected to save the firm $463,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

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

   $ _______________________

2. What are the net operating cash flows in Years 1, 2, and 3?

   Year 1:	$_______________
   Year 2:	$_______________
   Year 3:	$_______________

3. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?

   $ _______________________

4. If the project's cost of capital is 13 %, what is the NPV of the project?

   $

   Should the machine be purchased?

   Yes or No