Kinky Copies may buy a high-volume copier. The machine costs $80, 000 and will b

Question

Kinky Copies may buy a high-volume copier. The machine costs $80, 000 and will be depreciated straight-line over 5 years to a salvage value of $14,000. Kinky anticipates that the machine actually can be sold in 5 years for $23,000. The machine will save $14,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $7,000. The firm's marginal tax rate is 35%, and the discount rate is 10%. (Assume the net working capital will be recovered at the end of Year 5.) Calculate the NPV. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $ Should Kinky buy the machine? Yes No

Explanation / Answer

NO, kinky should not buy the machine because the NPV is negative.

Year 0 1 2 3 4 5 Machine cost -80000 Savings in labor 14000 14000 14000 14000 14000 Increase in working capital requirement -7000 7000 Less- Depreciation 13200 13200 13200 13200 13200 Profit -6200 800 800 800 7800 Less- tax @ 35% -2170 280 280 280 2730 Profit after tax -4030 520 520 520 5070 Add- Depreication 13200 13200 13200 13200 13200 Add- sale proceeds of machinery 23000 Cash flow -80000 9170 13720 13720 13720 41270 Present value factor 1 0.9091 0.8264 0.7513 0.6830 0.6209 Present value of cash flows -80000 8336.364 11338.84 10308.04 9370.945 25625.42 NPV = -15020.39

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