Question

Problem 9-15 Project Evaluation (LO2) 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.) What is the NPV of this project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV

Answer 1

Initial investment

purchase value 50000

Increase in working capital 4000

Total initial investment 54000

Depriciation (Purchase value-salvage value)/5

Depriciatiion (50000-8000)/5

Depriciation 8400

Net operating cashflow including taxes

Labour cost saving 8000

Tax expenses@35% 2800

Labour cost after taxes 5200

Taxes on depriciation 2940

Net operating cash flows 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 cash flows 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