Kinky Copies may buy a high-volume copier. The machine costs $60,000 and will be
ID: 2763294 • Letter: K
Question
Kinky Copies may buy a high-volume copier. The machine costs $60,000 and will be depreciated straight-line over 5 years to a salvage value of $10,000. Kinky anticipates that the machine actually can be sold in 5 years for $22,000. The machine will save $10,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $5,000. The firm’s marginal tax rate is 35%, and the discount rate is 11%. (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
NPV of the project
Figures in $
Year
Particulars
Amount
P.V Factor @ 11%
Total
0
Initial investment
-60000
1
-60000
1
Saving in cost (Note 1)
5000
0.900901
4504.505
2
Saving in cost (Note 1)
5000
0.811622
4058.112
3
Saving in cost (Note 1)
5000
0.731191
3655.957
4
Saving in cost (Note 1)
5000
0.658731
3293.655
5
Saving in cost (Note 1)
5000
0.593451
2967.257
Salvage value (Note 2)
17800
0.593451
10563.43
Working capital
25000
0.593451
14836.28
NPV
-16120.80
Note 1:
Saving in cost
Amount
Saving in labour and other cost
10000
(-) Tax shield (35%)
3500
Net saving in Cost
6500
(+) Depre tax Shield [{(60000-10000)/5}*0.35]
3500
(-) Working capital
5000
Total saving in cost
5000
Note: Assuming Working capital increase every year.
Note 2:
Salvage value of asset
Amount
Salvage value
22000
(-) Capital gain {(22000-10000)*0.35}
4200
Net salvage value
17800
Answer: As NPV of project is negative, machine should not be purchased.
NPV of the project
Figures in $
Year
Particulars
Amount
P.V Factor @ 11%
Total
0
Initial investment
-60000
1
-60000
1
Saving in cost (Note 1)
5000
0.900901
4504.505
2
Saving in cost (Note 1)
5000
0.811622
4058.112
3
Saving in cost (Note 1)
5000
0.731191
3655.957
4
Saving in cost (Note 1)
5000
0.658731
3293.655
5
Saving in cost (Note 1)
5000
0.593451
2967.257
Salvage value (Note 2)
17800
0.593451
10563.43
Working capital
25000
0.593451
14836.28
NPV
-16120.80
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.