Kinky Copies may buy a high-volume copier. The machine costs $30,000 and will be

Question

Kinky Copies may buy a high-volume copier. The machine costs $30,000 and will be depreciated straight-line over 5 years to a salvage value of $5,000. Kinky anticipates that the machine actually can be sold in 5 years for $12,000. The machine will save $5,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $2,500. 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?

Explanation / Answer

Initial Investment cost for machine = Cost of the machine + Increase in working capital = $30000 + $2500 = $32500 Depreciation cost per year = ($30000 - $5000)/5 years = $5000 Post tax yearly cash inflow for 5 years = [$5000 * (1-0.35)] + [$5000 * 0.35] = $5000 Cash inflow at the end of 5th year = $12000 - ($12000*0.35) + $2500 = $10300 Calculation of NPV Year PV Factor at 10% Cash flow PV 0 1 -$32,500.00 -$32,500.00 1 0.909090909 $5,000.00 $4,545.45 2 0.826446281 $5,000.00 $4,132.23 3 0.751314801 $5,000.00 $3,756.57 4 0.683013455 $5,000.00 $3,415.07 5 0.620921323 $5,000.00 $3,104.61 Sale value & recovery of WC 0.620921323 $10,300.00 $6,395.49 NPV -$7,150.58 Decision As NPV = -$7150.58 is negative , Kinky should not buy the machine.

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.