The Campbell Company

The Campbell Company is evaluating a proposal to buy a new milling form. The domicile price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The machine would submit a $5,500 increase in working capital (increased inventory less increased accounts payable).There would be no effect on revenues, but pre-tax delve costs would decline by $44,000 per year. The marginal tax rate is 35 percent. 1. What is the net cost of the machine for capital budgeting purposes, that is, the Year 0 project bullion flow? Net Cost of the machine = $108,000 + $12,500 + $5,500 = $126,000 2. What are the net operating cash flows during Years 1, 2 and 3? Year 0 1 2 3 After- evaluate Savings $28,600 $28,600 $28,600 Depreciation Tax Savings $13,918 $18,979 $6,326 Net Cash Flow $42,518 $47,579 $34,926 . What is the terminal year cash flow? Salvage Value $65,000 Tax on Salvage V alue $19,798 NWC Recovery $5,500 Terminal Cash Flow $50,702 4. If the projects cost of capital (WACC) is 12 percent, should the machine be purchased?Yes, the machine should be purchased as the investment has a positive NPV of $10,840 as per the following table. NPV Analysis Year Cash Flow PV Factor 12% PV 0 ($126,000) 1 ($126,000) 1 $42,518 0. 929 $37,962 2 $47,579 0. 7972 $37,929 3 $85,629 0. 7118 $60,949 NPV $10,840