Question

15. Project Evaluation. Kinky Copies may buy a high-volume copier. The machine costs $100,000

and this cost can be fully depreciated immediately. Kinky anticipates that the machine actually

can be sold in 5 years for $30,000. The machine will save $20,000 a year in labor costs but will

require an increase in working capital, mainly paper supplies, of $10,000. The firm’s tax rate is

21%, and the discount rate is 8%. What is the NPV of this project? (LO9-2)

Answer 1

Solution :-

At Year 0

Initial Cost = - $100,000

Depreciation Tax Shield = $100,000 * 21% = $21,000

Net Working Capital = - $10,000

Year 1 to 5

Net Annual Operating Cash flows =

After tax Labor Cost saving = $20,000 * ( 1 - 0.21 ) = $15,800

Year 5

Additional Cash Flows

Net Working Capital Recovery = $10,000

After tax Salvage Value = $30,000 * ( 1 - 0.21 ) = $23,700

Now Net Cashflows

Year 0 = - $100,000 + $21,000 - $10,000 = - $89,000

Year 1 - 4 = $15,800

Year 5 = $15,800 + $10,000 + $23,700 = $49,500

No NPV at Discount Rate 8% =

= - $89,000 + $15,800 * PVAF ( 8% , 4 ) + $49,500 * PVF ( 8% , 5 )

= - $89,000 + ( $15,800 * 3.312 ) + ( $49,500 * 0.6806 )

= - $89,000 + $52,331.6 + $33,688.87

= - $2,979.53

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