Question

Kinky Copies may buy a high-volume copier. The machine costs $80,000 and will be depreciated straight-line over 5 years to a salvage value of $14,000. Kinky anticipates that the machine actually can be sold in 5 years for $23,000. The machine will save $14,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $7,000. 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.)

Answer 1

Annual cash inflows
Annual savings in labour cost				14000
Less: Depreciation (80000-14000)/5				13200
Annual Savings after dep				800
Less: Tax @35%				280
Annual savings after tax				520
Add: Depreciation				13200
Annual cash inflows				13720
After tax salvage value realised:
Salvage realised				23000
Less: Tax (23000-14000)*35%				3150
After tax salvage value realised:				19850
Net Present value
Annual cash inflows for 5 years				13720
After tax salvage value				19850
Annuity PVF at 10% for 5 years				3.79079
PVf at 10% for 5th year				0.620921
Present value of Cash inflows				52009.64
Present value of salvage value				12325.28
Present value of WC realised (7000*0.620921)				4346.447
Total Present value of inflows				68681.37
Less: Initial Investment				80000
Less: Working capital Investment				70000
NPV				-18318.6