The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,070,000, and it would cost another $23,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $560,000. 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 $14,000. The sprayer would not change revenues, but it is expected to save the firm $384,000 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, 3?
c. What is the additional Year 3- cash flow (i. e. after tax salvage and the return of working capital)?
d. If the project's cost of capital is 12%, should the machine be purchased?