Question
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayers base price is $1,080,000, and it would cost another
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayers base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first 3 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 $380,000 per year in before-tax operating costs, mainly labor. Campbells marginal tax rate is 35%. 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. If the projects cost of capital is 12%, should the machine be purchased?
I only need help with part (D). The answer is 78,790, but I cant seemed to get that answer. I posted an example, but I dont know where I am doing wrong.
d. The purchase decision will be made with the help of net present value. Net present value is the tool used in capital budgeting to select the project. It is computed by finding the difference between present value of cash inflow and outflow. The project with positive net present value is selected. The net present value will be computed in the following manner: CF CF NPV +Initial cost + r Here, CF Cash inflow for the year one CF Cash inflow for the year two CF Cash inflow for the year n r Cost of capital Now, the net present value will be CF CF + " I-Initial cost S375,612 $418,521 S304,148 1+.12 $ 1,1 02.500 + $78,790 The net present value is positive. Hence, the C Company should buy the new machineStep by Step Solution
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