Question

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $880,000, and it would cost another $19,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $463,000. 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 $14,500. The sprayer would not change revenues, but it is expected to save the firm $330,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. A. What is the Year 0 net cash flow?

B. What are the net operating cash flows in Years 1, 2, and 3?
C. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?
D. Based on your IRR analysis, if the projectâs cost of capital is 12%, should the machine be purchased?.

Answer 1

A. -1118000 B. Y1=375612Y2=418521Y3= 304148 C. 803657 D. 26%

Step-by-step explanation:

Managerial Finance.

A.) 0 Year Net Cash Flow = -1080000-22500-15500= -1118000

B.) Y1=375612

Y2=418521

Y3= 304148

C.) 60500 + (605000-81695) * (.35) + 15500 = 803657

D.) IRR put the value of Net Present Value (NPV) as 0

NPV= -1118000 +375612/(1+r)^1 + 418521/ (1+r)^2 + (304148) + 803657) / (1+r) ^ 3

we get 25.87 or 26%

Yes.