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13-6 New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayers base price is $920,000, and it would cost another $20,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $500,000. 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 $15,500. The sprayer would not change revenues, but it is expected to save the firm $304,000 per year in before-tax operating costs, mainly labor. Campbells marginal tax rate is 25%.

What is the Year-0 cash flow? Answer: $955,500.

What are the project recurring cash flows in Years 1, 2, and 3? Answer: $306,325.5; $332,457.5; $262,803.5.

What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? Answer: $407,913.5.

If the projects cost of capital is 12%, what is the NPV? Answer: NPV = $60,441.11 ; Purchase.

Suppose the values for this problem change to:

Base Price: $993 thousand

Installation Cost: $28 thousand

Cost Savings: $310 thousand

Salvage Value: $502 thousand

Tax Rate: 18%

What is the NPV of the project?