The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer'sbase price is $940,000, and it would cost another $16,000 to install it. The machine falls into the MACRS3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $626,000. The machine would require an increase in net working capital(inventory) of $16,000. The sprayer would not change revenues, but it is expected to save the firm$451,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. Cashoutflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round youranswers to the nearest dollar.a. What is the Year-0 net cash flow?$b. What are the net operating cash flows in Years 1, 2, and 3?Year 1: $Year 2: $Year 3: $c. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?$d. If the project's cost of capital is 10 %, what is the NPV of the project?Should the machine be purchased?-Select- vh

The capital budgeting process is one that is helping the company to evaluate projects and then take…

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 $1,030,000, and it would cost another $25,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $473,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $18,500. The sprayer would not change revenues, but it is expected to save the firm $396,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) 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? $ What are the net operating cash flows in Years 1, 2, and 3? Year 1: $ Year 2: $ Year 3: $ What is the additional…
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter_____________ be purchased because the net present value, that is $__________ , is ______ zero.
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $425,000 and would cost another $44,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $210,000. Using the setter requires a $29,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $161,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 12 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter_____ be purchased because the net present value________, that is $ , is zero.
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,130,000, and it would cost another $18,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $578,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $19,000. The sprayer would not change revenues, but it is expected to save the firm $359,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-0 net cash flow? $ b. What are the net operating cash flows in Years 1, 2, and 3? Year 1:$ Year 2:$ Year 3:$ c. What is the additional Year-3 cash flow (i.e, the…
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,060,000, and it would cost another $20,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $488,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $358,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) 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? $ What are the net operating cash flows in Years 1, 2, and 3? Year 1: $ Year 2: $ Year 3: $ What is the additional…
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $150,000, and it would cost another $22, 500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $52, 500. The applicable depreciation rates are 33%, 45% , 15%, and 7%. The equipment would require a $13, 000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $30,000 per year in before - tax labor costs. The firm's marginal federal - plus - state tax rate is 40%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2…
A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 35%, and the appropriate cost of capital is 14%. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.$ What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest whole dollar. CF1 $ CF2 $…
Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.14 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.99 million 10 years ago, and can be sold currently for $1.24million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.54 million higher than with the existing press, but product costs (excluding depreciation) will represent 52% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS table attached, using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.8%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) d. Determine the net present value (NPV) and the internal rate of return (IRR)…
Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $32,000 (delivered). An additional $4,000 will be needed to install the device. The new device has an estimated 18-year service life. The estimated salvage value at the end of 18 years will be $2,000. The new control device will be depreciated as a 7-year MACRS asset. The existing control device (original cost = $15,000) has been in use for 9 years, and it has been fully depreciated (that is, its book value equals zero). Its scrap value is estimated to be $2,500. The existing device could be used indefinitely, assuming the firm is willing to pay for its very high maintenance costs. The firm's marginal tax rate is 40 percent. The new control device requires lower maintenance costs and frees up personnel who normally would have to monitor the system. Estimated annual cash savings from the new device will be $5,000. The firm's cost of capital is 10 percent. What is the NPV?
Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $410,000 is estimated to result in $150,000 in annual pre-tax cost savings. The press falls into Class 8 for CCA purposes (CCA rate of 20% per year), and it will have a salvage value at the end of the project of $55,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $3,100 in inventory for each succeeding year of the project. If the shop’s tax rate is 35% and its discount rate is 9%. Calculate the NPV of this project.
Nguyen Inc. is considering the purchase of a new computer system (ICX) for $140,000. The system will require an additional $20,000 for installation. If the new computer is purchased it will replace an old system that has been fully depreciated. The new system will be depreciated over a period of 8 years using straight-line depreciation. If the ICX is purchased, the old system will be sold for $20,000. The ICX system, which has a useful life of 8 years, is expected to increase revenues by $31,000 per year over its useful life. Operating costs are expected to decrease by $3,000 per year over the life of the system. The firm is taxed at a 40 percent marginal rate. Round your answers to the nearest dollar. A. what investment is required to acquire the ICX system and replace the old system? B. compute the annual net cash flows associated with the purchase of the ICX system.
You must evaluate the purchase of a spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 4 year class and would be sold after 4 years for $60,000. The applicable depreciation rates are 33%, 45%, 15% and 7%. The equipment would require an $8000 increase in net operating working capital. The project would have no effect on revenues, but it should save the firm $50,000 per year before-tax labour costs. The firm's marginal federal-plus state tax rate is 40%. QUESTION: If the WACC is 12%, should the spectrometer be purchased? Explain.

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