Intermediate Financial Management
Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 13, Problem 6P

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first 3 years are 0.3333, 0.4445, and 0.1481. 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 $380,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%.

  1. a. What is the Year-0 cash flow?
  2. b. What are the net operating cash flows in Years 1, 2, and 3?
  3. c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?
  4. d. If the project’s cost of capital is 12%, should the machine be purchased?
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