Kinky Copies may buy a high-volume copier. The machine costs $90,000 and will be
ID: 2732608 • Letter: K
Question
Kinky Copies may buy a high-volume copier. The machine costs $90,000 and will be depreciated straight-line over 5 years to a salvage value of $16,000. Kinky anticipates that the machine actually can be sold in 5 years for $24,000. The machine will save $16,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $8,000. 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.)
Kinky Copies may buy a high-volume copier. The machine costs $90,000 and will be depreciated straight-line over 5 years to a salvage value of $16,000. Kinky anticipates that the machine actually can be sold in 5 years for $24,000. The machine will save $16,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $8,000. 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.)
Explanation / Answer
NPV is $4,905
Year Pre Tax CF Add Depreciation Post Tax CF(100%-35%) DF @ 7% DCF 0 (98,000) - (98,000) 1.0000 (98,000) 1 16,000 14,800 20,020 0.9346 18,710 2 16,000 14,800 20,020 0.8734 17,486 3 16,000 14,800 20,020 0.8163 16,342 4 16,000 14,800 20,020 0.7629 15,273 5 16,000 14,800 20,020 0.7130 14,274 5 32,000 - 29,200 0.7130 20,819 4,905
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