Kinky Copies may buy a high-volume copier. The machine costs $50, 000 and will b

Question

Kinky Copies may buy a high-volume copier. The machine costs $50, 000 and will be depreciated straight-line over 5 years to a salvage value of $8,000 Kinky anticipates that the machine actually can be sold in 5 years for $16,000. The machine will save $8,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $4,000. The firm's marginal tax rate is 35%. and the discount rate is 15%. (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.)

Explanation / Answer

Initial Investment Purchase value 50000 Increase in working capital 4000 Total Initial Invetment 54000 Depreciation (Purchase value-Salvage value)/5 Depreciation (50000-8000)/5 Depreciation 8400 Net operating cashflows (including taxes) Labour cost saving 8000 Tax expenses @ 35% 2800 Labour cost after taxes 5200 Taxes on depreciation 2940 Net operating cashflows 8140 Proceeds from sale (A) 16000 Salvage value 8000 Taxable proceeds 8000 Tax expenses @ 35% (B) 2800 After tax proceeds (A)-(B) 13200 Working capital increase 4000 Total non-operating cashflows 17200 Time A B C D=B+C A*D 0 1 -54000 -54000 -54000 1 0.9259 8140 8140 7537.037 2 0.8573 8140 8140 6978.738 3 0.7938 8140 8140 6461.794 4 0.7350 8140 8140 5983.143 5 0.6806 8140 36500 44640 30381.23 3341.946

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