Kinky Copies may buy a high-volume copier. The machine costs $170,000 and will b

Question

Kinky Copies may buy a high-volume copier. The machine costs $170,000 and will be depreciated straight-line over 5 years to a salvage value of $30,000. Kinky anticipates that the machine actually can be sold in 5 years for $37,000. The machine will save $30,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $15,000. The firm’s marginal tax rate is 35%, and the discount rate is 7%. (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.)

Calculate the NPV. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Time line 0 1 2 3 4 5 Cost of new machine -170000 Increase in working capital -15000 =Initial Investment outlay -185000 Savings in labor 30000 30000 30000 30000 30000 -Depreciation (Cost of new machine-salvage value)/5 -40000 -40000 -40000 -40000 -40000 30000 =Salvage book value =Pretax cash flows -10000 -10000 -10000 -10000 -10000 -taxes =(Pretax cash flows)*(1-tax) -6500 -6500 -6500 -6500 -6500 +Depreciation 40000 40000 40000 40000 40000 =after tax operating cash flow 33500 33500 33500 33500 33500 Reversal of NWC 15000 +selling price*(1-tax rate) 24050 +Salvage BV*tax rate 10500 =after tax non operating CF 49550 Total Cash flow for the period -185000 33500 33500 33500 33500 83050 Discount rate= 7.00% Discount factor= (1+ required rate)^N 1 1.07 1.1449 1.225043 1.310796 1.402552 Discounted cash flow= total cash flow/discount factor -185000 31308.41 29260.2 27345.98 25556.99 59213.5 NPV= Sum of discounted cash flow = -12314.92

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