The Campbell Company is considering adding a robotic paint sprayer to its production line. The...

Question:

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $25,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. 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 $15,500. The sprayer would not change revenues, but it is expected to save the firm $370,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. If the project's cost of capital is 12%, should the machine be purchased?

Net Present Value:

Net present value is a commonly used method to evaluate profitability of an investment, especially if the investment involves more than one period in time. An investment's net present value is the present value of positive cash flows minus the present value of negative cash flows, discounted at the required return on the investment.

Answer and Explanation:

The investment should be purchased because it has a positive net present value of $174,048.272.

We can use the net present value (NPV) method to...

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Evaluating a Budget Using the Net Present Value Method

from Accounting 301: Applied Managerial Accounting

Chapter 14 / Lesson 3
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