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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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
Transcribed Image Text:6. Problem 11-06 (New-Project Analysis)
eBook
New-Project Analysis
Problem Walk-Through
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,050,000, and it would cost another $20,500 to install it. The machine falls into the
MACRS 3-year class, and it would be sold after 3 years for $613,000. 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 $19,000. The sprayer would not change revenues, but it is expected to save the firm $400,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%.
(Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.
a. What is the Year-0 net cash flow?
b. What are the net operating cash flows in Years 1, 2, and 3?
Year 1:$
Year 2:$
Year 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 project's cost of capital is 13%, what is the NPV of the project?
Should the machine be purchased?
-Select-
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