Answer:
a. What is the Year 0 net cash flow?
- = $1,102,500 + $15,500 = $1,118,000
b. What are the net operating cash flows in Years 1, 2, 3?
- NCF Year 1 = $375,496.38
- NCF Year 2 = $418,521.44
- NCF Year 3 = $304,148.09
c. What is the additional Year 3-cash flow (i.e. after tax salvage and the return of working capital)?
d. If the project's cost of capital is 12%, should the machine be purchased?
- NPV = $20,384.22 since it is positive, then the project should be carried out and the machine should be purchased.
Explanation:
book value of the robotic sprayer = $1,080,000 + $22,500 = $1,102,500
useful life 3 years, salvage value $605,000
MACRS 3-year class:
0.333 x $1,102,500 = $367,132.50
0.4445 x $1,102,500 = $490,061.25
0.1481 x $1,102,500 = $163,280.25
requires an additional $15,500 investment in inventory
saves $380,000 per year
marginal tax rate 35%
net cash flow year 1 = [net savings x (1 - tax rate)] + (depreciation expense x tax rate) = ($380,000 x 65%) + ($367,132.50 x 35%) = $247,000 + $128,496.38 = $375,496.38
net cash flow year 2 = [net savings x (1 - tax rate)] + (depreciation expense x tax rate) = ($380,000 x 65%) + ($490,061.25 x 35%) = $247,000 + $171,521.44 = $418,521.44
net cash flow year 3 = [net savings x (1 - tax rate)] + (depreciation expense x tax rate) = ($380,000 x 65%) + ($163,280.25 x 35%) = $247,000 + $57,148.09 = $304,148.09
terminal cash flow = [sales price - (purchase cost - accumulated depreciation)] x (1 - tax rate) + recovered net working capital = [$605,000 - ($1,102,500 - $1,020,474)] x 0.65 + $15,500 = $355,433.10
using an excel spreadsheet I calculated the NPV:
Year 0 -$1,118,000
Year 1 $375,496.38
Year 2 $418,521.44
Year 3 $304,148.09 + $355,433.10 = $659,581.19
discount rate 12%
NPV = $20,384.22
