11.6. New-Project Analysis: The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,014,000.00, and it would cost another $25,100.00 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 $525,500.00. The machine would require an increase in net working capital (inventory) of $9,000.00. The sprayer would not change revenues, but it is expected to save the firm $450,450.00 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 39.00%. d. If the project’s cost of capital is 16.45%, what is the NPV of the project? Round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72. $80,611.72 $91,676.07 $90,885.76 $96,417.94 $79,031.10
The sprayer’s base price is $1,014,000.00
it would cost another $25,100.00 to install it
So total cost of Machine = $1,014,000+$25,100
=1039100
The machine falls into the MACRS 3-year class
| Year | Rate |
| 0 | |
| 1 | 33.33% |
| 2 | 44.45% |
| 3 | 14.81% |
| 7.41% |
it would be sold after 3 years for $525,500.00
increase in net working capital (inventory) of $9,000.00 SO cash out flow iach year is $ 9000
it is expected to save the firm $450,450.00 per year in before-tax operating costs, mainly labor. So increase in income will be $ 450,450
Calculation of the NPV of ther project is as follow
MACRS is a depreciation method that is used only for income tax purposes.Salvage value is not taken into consideration
| Year | Macine Cost |
Working Capital |
Saving in cost |
Depriciation | income befor Tax |
Tax @ 39% | Add Depriciation |
Cash flow After add dep. |
Slavage value |
Net Cash Flow |
PV Factor @ 16.45 |
Prasent Value |
| 0 | -1039100 | -1039100 | 1 | (1,039,100.00) | ||||||||
| 1 | -9000 | 450450 | -346332.03 | 104117.97 | 40606.0083 | 346332.03 | 386938.0383 | 377938.0383 | 0.858737656 | 324,549.62 | ||
| 2 | -9000 | 450450 | -461879.95 | -11429.95 | -4457.6805 | 461879.95 | 457422.2695 | 448422.2695 | 0.737430361 | 330,680.20 | ||
| 3 | -9000 | 450450 | -230888.02 | 219561.98 | 85629.1722 | 230888.02 | 316517.1922 | 525500 | 833017.1922 | 0.63325922 | 527,515.82 | |
| 143,645.64 |
the NPV of the project = $ 143.645.64
