Kinky Copies may buy a high-volume copier. The machine costs $190,000 and will b
ID: 2766994 • Letter: K
Question
Kinky Copies may buy a high-volume copier. The machine costs $190,000 and will be depreciated straight-line over 4 years to a salvage value of $30,000. Kinky anticipates that the machine actually can be sold in 4 years for $35,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper s upplies, of $15,000. The firm’s marginal tax rate is 40%, and the discount rate is 9%.
Calculate the NPV. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
2.
Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 68,000 units a year at a price of $50 each. If the new product is a bust, only 48,000 units can be sold at a price of $45. The variable cost of each ball is $20, and fixed costs are zero. The cost of the manufacturing equipment is $7.8 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm’s tax rate is 35%, and the discount rate is 12%.
If each outcome is equally likely, what is expected NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to the nearest dollar amount.)
Suppose now that the firm can abandon the project and sell off the manufacturing equipment for $7.02 million if demand for the balls turns out to be weak. The firm will make the decision to continue or abandon after the first year of sales. What is expected NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to the nearest dollar amount.)
For question 2 I only need b-1
Kinky Copies may buy a high-volume copier. The machine costs $190,000 and will be depreciated straight-line over 4 years to a salvage value of $30,000. Kinky anticipates that the machine actually can be sold in 4 years for $35,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper s upplies, of $15,000. The firm’s marginal tax rate is 40%, and the discount rate is 9%.
Explanation / Answer
1)
Depreciation tax saving = ($190,000 - $30,000) / 4 x 40% = $16,000
Salvage value post tax = $35,000 x (1 - 0.40) = $21,000
Calculations Year 0 1 2 3 4 A Savings 20000 20000 20000 20000 B Less: Tax -8000 -8000 -8000 -8000 C = A - B Net Savings 12000 12000 12000 12000 D Add: Depreciation tax Saving 16000 16000 16000 16000 E = C + D Net Savings 28000 28000 28000 28000 F Initial Cost -190000 G Salvage Value post tax 21000 H Working Capital -15000 15000 I = E + F + G+ H Net Cash Flows -205000 28000 28000 28000 64000 J PV Factor @9% 1.0000 0.9174 0.8417 0.7722 0.7084 K = I x J Present Value -205000 25688.07 23567.04 21621.14 45339.21 L = Sum K Net Present Value -88784.54Related Questions
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