The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $880,000, and it would cost another $19,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $463,000. 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 $14,500. The sprayer would not change revenues, but it is expected to save the firm $330,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. A. What is the Year 0 net cash flow?
B. What are the net operating cash flows in Years 1, 2, and 3?
C. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?
D. Based on your IRR analysis, if the projectâs cost of capital is 12%, should the machine be purchased?.