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stich3 [128]
2 years ago
5

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,020,00

0, 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-
Mathematics
1 answer:
tatyana61 [14]2 years ago
5 0

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.

<h3>What is the net present value?</h3>

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:

<h3>Data and Calculations:</h3>

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)

<h3>Determination of Net Present Value (NPV):</h3>

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 brainly.com/question/18848923

#SPJ1

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