The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,074,000.00, and it would cost another $19,900.00 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 $601,500.00. The machine would require an increase in net working capital (inventory) of $9,300.00. The sprayer would not change revenues, but it is expected to save the firm $379,450.00 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 36.00%.
1. If the project's cost of capital is 12.75%, what is the NPV of the project?
2. What is the Year 0 net cash flow?
3. What are the net operating cash flows in Years 1, 2, and 3?
4. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)?
5. Should the machine be purchased? Why?
SHOW YOUR WORK AND EXPLAIN YOUR ANSWERS