Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,050,000, and it would cost another $24,000 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 $622,000. 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 $382,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. What is the Year 0 net cash flow

Answer 1

The Year 0 net cash flow is $1,092,000.

What is zero year net cash flow?

a real zero cash flow property, sometimes known as "zero," is a highly leveraged asset that is set up so that the net operating income (NOI), which serves as the basis for distribution to equity investors, equals the loan payment.

Calculation for the Year 0 net cash flow:

The sprayer's base price of robotic paint sprayer is $1,050,000.

The installation of robotic paint sprayer is $24,000.

Book value of the robotic paint sprayer = base price + installation

                                                                = $1,050,000 + $24,000

                                                                = $1,074,000

Year 0 net cash flow = Book value +  Net working capital

                                  = $1,074,000 +  $18,000

                                  = $1,092,000

Therefore, the year 0 net cash flow is $1,092,000.

To know more about estimation of net operating income (NOI), here

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