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Problem:

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price $1,080,000, and it would cost another $22,500 to install it. The machine falls into MACRS 3- year class, and it would be sold after 3 years for $605,000. The MACRS rates for 3 years are 0.333, 0.4445, 0.1481. The machine wold require an increase in the net working capital (inventory) of $15,500. The sprayer would no change revenues, but is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

Required:

Question 1: What is the Year 0 net cash flow?

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

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

Question 4: If the project's cost of capital is 12%, should the machine be purchased?

Note: Please show guided help with steps and answer.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91172459

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