Assume that you work for Federal Express (FDX) and are evaluating the purchase of a robot to be used in the Memphis terminal. The base price for the robot is $140,000 and it would cost an additional $30,000 to modify it for FDXs special use. The robot will be placed on the MACRS 3-year class life and would be sold after 3 years for $60,000. The robot would require an $8,000 increase in net operating working capital (spare parts inventory). The increase in net operating working capital will be recovered fully when the robot is salvaged. The project would have no effect on revenues, but is expected to save FDX $60,000 per year in before-tax labor costs. FDXs marginal federal plus state tax rate in Tennessee is 27.5%. Assuming a 12%, WACC for FDX, should the robot be purchase and installed?

Estimate the Initial Cash Flows, Operating Cash Flows and Terminal Cash Flows, and determine the NPV for the project and the IRR for the project. Please set this problem up in your own Excel Spreadsheet. Your spreadsheet should us the following format:

Depreciation Schedule:3-year class life, assuming half year convention

Initial Basis _____________

Year Dep Rate Depreciation Adj Basis

1 0.33 _________ _________

2 0.45 _________ _________

3 0.15 _________ _________

4 0.07 _________ __________

Initial Cash Flows at t = 0: CAPEX is total initial capital cost and ^NOWC is the net increase in working capital

Price -$_______

Modification ______

CAPEX -$_______

^NOWC -8,000

Initial investment outlay -$_______

Robots operating cash flows:

Year CFBT Depreciation Taxable Income Taxes@27.5% CFAT

1 60,000 _________ _________ _________ _______

2 60,000 _________ _________ _______0_* _______

3 60,000 _________ _________ _________** _______

* Since the tax code no longer allows operating loss carry back, the lowest a firms can be in a given year is zero (0).

**Operating losses may be carried forward, thus reducing taxes in year 3 are: ($34,500-$16,500)*0.275=$4,950

Robots Terminal cash flows at t = 3:

Salvage value Tax on salvage value Recovery of NOWC CFAT

$60,000 _________** 8,000 _______

**Tax on Salvage =(Salvage valueAdjusted Basis)0.275 = _____________

NPV= $__________

IRR= __________%

Should your firm purchase or reject the new machine?

Assume that you work for Federal Express (FDX) and are evaluating the purchase of me to be used in the Memphis terminal. The base price for the robot 10.000 dan additional $20,000 to modify it for FDX's special. The robot will be placed MACRS Byear class life and would be sold after 3 years for 50,000. The mbetwold require an S.000 increase in net operating working capital spare parts inventory. The increase in operating working capital will be recovered fully when the bois salvaged. The project will be me effect on thes, but is expected to save FDX S61.000 per year in bele is libero. FDXS marginal federal plus state tax rate in Tennessee is 25.8%. Assuminga WACC FDX should the robot be purchase and installed Estimate the initial Cash Flows Operating allows and Terminal Case de the NPV for the project and the IRR for the project. These things up in your Excel Spreadsheet. Your spreadsheet should as the following format: Depreciation Schedular class of assuming half sarcom Initial Basis Year Dep Rate Depreciation Adj Basis 1 2 3 0.15 6.67 . Initial Cash Flows off : CAPEX is Rotal initial capital and "NOW Citroef inch in wel Price Modification CAPEX ANOWC Initial investment atta Kon 1 Robotgrating cash flow CFNT Depreciation Table Income Tea2.5% CEAT 0.000 2 60.000 Since the tar cade no longer allows operating how carry back, the lowest afirms can be in aglen year hero 10). 3 **Operating losses may be carried forward, thus reducing tases in year a: 1534.00 $16.500-275-54,950 Robe's Terminal cash flower Salvage wale Tex en lugar Besence of NOW SEAT 560,000 8.000 **Taxon Salvage Salvage value-Adjustod Basis 0.275 NPVES IRR- Should your firm purchase or reject the new machine Assume that you work for Federal Express (FDX) and are evaluating the purchase of me to be used in the Memphis terminal. The base price for the robot 10.000 dan additional $20,000 to modify it for FDX's special. The robot will be placed MACRS Byear class life and would be sold after 3 years for 50,000. The mbetwold require an S.000 increase in net operating working capital spare parts inventory. The increase in operating working capital will be recovered fully when the bois salvaged. The project will be me effect on thes, but is expected to save FDX S61.000 per year in bele is libero. FDXS marginal federal plus state tax rate in Tennessee is 25.8%. Assuminga WACC FDX should the robot be purchase and installed Estimate the initial Cash Flows Operating allows and Terminal Case de the NPV for the project and the IRR for the project. These things up in your Excel Spreadsheet. Your spreadsheet should as the following format: Depreciation Schedular class of assuming half sarcom Initial Basis Year Dep Rate Depreciation Adj Basis 1 2 3 0.15 6.67 . Initial Cash Flows off : CAPEX is Rotal initial capital and "NOW Citroef inch in wel Price Modification CAPEX ANOWC Initial investment atta Kon 1 Robotgrating cash flow CFNT Depreciation Table Income Tea2.5% CEAT 0.000 2 60.000 Since the tar cade no longer allows operating how carry back, the lowest afirms can be in aglen year hero 10). 3 **Operating losses may be carried forward, thus reducing tases in year a: 1534.00 $16.500-275-54,950 Robe's Terminal cash flower Salvage wale Tex en lugar Besence of NOW SEAT 560,000 8.000 **Taxon Salvage Salvage value-Adjustod Basis 0.275 NPVES IRR- Should your firm purchase or reject the new machine