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The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,020,000, and it would cost another $22,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $599,000. 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 $19,500. The sprayer would not change revenues, but it is expected to save the firm $386,000 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 Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? $ If the project's cost of capital is 11%, what is the NPV of the project? $ Should the machine be purchased? -Select-

Sagot :

Anthougoidn

1. The Year-0 net cash flow is -$1,061,500.

2. The net operating cash flows in Years 1, 2, and 3 are as follows:

Year 1: $288,750 ($386,000 x 1 - 0.25)

Year 2: $288,750 ($386,000 x 1 - 0.25)

Year 3: $288,750 ($386,000 x 1 - 0.25)

3. The additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital) is $468,750 {($599,000 x 1 - 0.25) + $19,500}.

4. The NPV of the project is ($13,139).

5. The machine should not be purchased because it does not yield a positive NPV.

What is the net present value?

The net present value (NPV) shows the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

It is determined by calculating the present values of cash flows using their present value factors as below:

Data and Calculations:

Initial cash outlay = $1,061,500 ($1,020,000 + $22,000 + $19,500)

Salvage value = $599,000

Increase in net working capital = $19,500

Annual savings before tax = $386,000

Tax rate = 25%

Annuial savings after tax = $288,750 ($386,000 x 1 - 0.25)

Determination of Net Present Value (NPV):

Year      Cashflows        PV Factor     Present Value

0          -$1,061,500               1             -$1,061,500

1              $288,750          0.901           $260,164

2             $288,750          0.812          $234,465

3             $288,750          0.731            $211,076

3             $468,750          0.731          $342,656

Net present value                                -$13,139

Thus, the project should not be undertaken by The Campbell Company due to the negative NPV that it yields.

Learn more about determining the NPV at https://brainly.com/question/18848923

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