Problem:

Firm S is considering adding a robotic device to its production line. The device base price is $1,038,000.00, and it would cost another $21,500.00 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 $563,000.00. The machine would require an increase in net working capital (inventory) of $7,500.00. The sprayer would not change revenues, but it is expected to save the firm $446,450.00 per year in before-tax operating costs, mainly labor. Firm S marginal tax rate is 30.00%.

Required:

Question 1: If the project's cost of capital is 12.65%, what is the NPV of the project?

Question 2: What is the Year 0 net cash flow?

Question 3: What are the net operating cash flows in Years 1, 2, and 3?

Question 4: What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital also called terminal value)?

Question 5: Should the machine be purchased? Why

Illustrate in detail clarify all workings.