The Campbell Company is considering adding a robotic paint s

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer\'s base price is $1,140,000, and it would cost another $16,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $603,000. The machine would require an increase in net working capital (inventory) of $14,500. The sprayer would not change revenues, but it is expected to save the firm $466,000 per year in before-tax operating costs, mainly labor. Campbell\'s marginal tax rate is 30%.

If the project\'s cost of capital is 14 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

Solution

Year 0 net cash flow = - Base Price - Installation Cost - Net Working Capital

= -$1,140,000 - $16,000 - $14,500 = -$1,170,500

Year 1 net cash flow = Savings(1 - T) + [(Base Price + Installation)*Depreciation Rate*Tax Rate]

= $466,000*(1 - 30%) + [($1,140,000 + $16,000)*0.3333*30%]

= $326,200 + $115,588.44 = $441,588.44   

Year 2 net cash flow = Savings(1 - T) + [(Base Price + Installation)*Depreciation Rate*Tax Rate]

= $466,000*(1 - 30%) + [($1,140,000 + $16,000)*0.4445*30%]

= $326,200 + $154,152.60 = $480,352.60

Year 3 net cash flow = Savings(1 - T) + [(Base Price + Installation)*Depreciation Rate*Tax Rate

= $466,000*(1 - 30%) + [($1,140,000 + $16,000)*0.1481*30%]

= $326,200 + $51,361.08 = $377,561.08

Additional Year 3 net cash flow = Sale Price - [Sale Price - (Initial Price * 0.0741)]*30% + Working Capital

= $603,000 - [$603,000 - ($1,140,000 +$16,000)*0.0741]*30% + $14,500

= $603,000 - $155,202.12 + $14,500 = $462,297.88

NPV = Year 0 net cash flow + Net operating cash flows in Years 1 /1.14 + Net operating cash flows in Years 2/1.14^2 + Net operating cash flows in Years 3/1.14^3 + Additional Year-3 cash flow/1.14^3

NPV = - $1,170,500 + $441,588.44/1.14^1 + $480,352.60/1.14^2 + $377,561.08/1.14^3 + $462,297.88/1.14^3

NPV = -$1,170,500 + $387,358.28 + $369,615.73 + $254,842.97 + $312,037.90

NPV = $153,354.88