The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer'sbase price is $940,000, and it would cost another $16,000 to install it. The machine falls into the MACRS3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $626,000. The machine would require an increase in net working capital(inventory) of $16,000. The sprayer would not change revenues, but it is expected to save the firm$451,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%. Cashoutflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round youranswers to the nearest dollar.a. What is the Year-0 net cash flow?$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 10 %, what is the NPV of the project?Should the machine be purchased?-Select- vh

The capital budgeting process is one that is helping the company to evaluate projects and then take…

Answered: The Campbell Company is considering…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,070,000, and it would cost another $21,500 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 $696,000. The machine would require an increase in net working capital (inventory) of $15,000. The sprayer would not change revenues, but it is expected to save the firm $405,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. a. What is the Year 0 net cash flow? b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. 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)? Do not round intermediate calculations. Round your answer to the nearest…
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