FIN - 650 --- Problem 11-06 (New-Project Analysis)

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $830,000, and it would cost another $18,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $490,000. 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 $18,000. The sprayer would not change revenues, but it is expected to save the firm $396,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

1. What is the Year-0 net cash flow?

2. What are the net operating cash flows in Years 1, 2, and 3?

3. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)?

4. If the project's cost of capital is 11%, what is the NPV of the project?

Should the machine be purchased?