***COMPLETE USING EXCEL***

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 $145,000 and it would cost an additional $25,000 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 $70,000. The robot would require an $7,000 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 $58,000 per year in before-tax labor costs. FDXs marginal federal plus state income 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 and upload it to drop box. Your spreadsheet should us the following format:

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

Initial Basis	170,000
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 -$145,000

Modification -25,000

CAPEX -$170,000

^NOWC -7,000

Initial investment outlay -$177,000

Robots operating cash flows*:

Year CFBT Depreciation Taxable Income Taxes@27.5% CFAT

1 58,000 57,477.50

2 58,000 -18,500 -5,087.50 63,087.50

3 58,000 49,062.50

*Taxable income in year 2 is negative, resulting in a negative tax; however, project Operating losses in year 2 are offset by other FDX income.

Robots Terminal cash flows at t = 3:

Salvage value Tax on salvage value Recovery of NOWC CFAT

$70,000 ** 7,000

**Tax on Salvage =(Salvage valueAdjusted Basis)0.275=($70,000 $11,900)0.275= $15,977,50

NPV= $2,968.49

IRR= 12.87%

Should your firm purchase or reject the new machine?