The Campbell Company is considering adding a robotic paint sprayer to its productionline. The sprayer's base price is $920,000, and it would cost another $20,000 to installit. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for$500,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Themachine would require an increase in net working capital (inventory) of $15,500. Thesprayer would not change revenues, but it is expected to save the firm $304,000 per yearin before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%.a. What is the Year-0 cash flow?b. What are the cash flows in Years 1, 2, and 3?c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the returnof working capital)?d. If the project's cost of capital is 12%, what is the NPV?(11-6)New-ProjectAnalysis

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Answered: The Campbell Company is considering…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $20,000 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 $576,000. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $424,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. What is the Year-0 net cash flow? $ If the project's cost of capital is 11 %, what is the NPV of the project? $
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