solution

Campbell Inc. is evaluating a proposed acquisition of a new milling machine. The machine’s
base price is $108,000. This will be depreciated straight-line to a salvage of zero over its three-year
life. The machine will require an immediate increase in net working capital of $20,000. The
milling machine will increase the firm’s sales by $160,000 each year. In addition, the firm will
incur $105,000 in before-tax operating costs each year, mainly labor. It is expected the firm will
sell the fixed assets for $10,000, pre-tax, at the end of the life of the project. The marginal tax
rate is 40% and the firm’s cost of capital is 10%.
5. The after-tax operating cash flow for year 1 for the Campbell project is closest to
A.$11,000
B.$33,000
C.$47,000
D.$55,000
6. The terminal year after-tax cash flow EXCLUDING OCF for the Campbell project is closest
to
A.$6,000
B.$20,000
C.$26,000
D.$30,000
7. The NPV for the Campbell project is closest to
A.$0
B.$9,000
C.$14,000
D$22,000
8. Suppose Campbell’s investment in net working capital is actually $25,000 instead of $20,000.
How would this affect the project NPV?
A. Decrease it
B.Not affect it
C. Increase it