Question

.Kinky Copies may buy a high-volume copier. The machine costs $160,000 and this cost can be fully depreciated immediately. Kinky anticipates that the machine actually can be sold in 5 years for $38,000. The machine will save $28,000 a year in labor costs as an after-tax reduction, but will require an increase in working capital, mainly paper supplies, of $14,000. The firm’s marginal tax rate is 21%, and the discount rate is 6%. (Assume the net working capital will be recovered at the end of Year 5.) .

What is the NPV of this project?

Answer 1

To calculate the NPV, you discount the initial cost of the copier, the after-tax annual labor savings, the salvage value, and the recovery of net working capital, all adjusted by the tax rate. Use financial formulas or tools to determine the present values and sum them to find the NPV.

Step-by-step explanation:

The question requires us to calculate the Net Present Value (NPV) of purchasing a high-volume copier for a business. To find the NPV, we must consider the initial cost, annual savings, salvage value, change in working capital, tax rate, and discount rate. Here are the details:

• Initial cost of the copier: $160,000 (fully depreciated immediately)
• Annual labor savings (after-tax): $28,000 per year for 5 years
• Salvage value after 5 years: $38,000
• Change in working capital: Increase of $14,000 (recovered at the end of Year 5)
• Tax rate: 21%
• Discount rate: 6%

To calculate the NPV, we will discount each of these cash flows to their present value and then sum them. The formula for the present value of an annuity can be used for the annual labor savings, while the formula for the present value of a single sum can calculate the present values of the initial cost, salvage value, and recovery of net working capital.

However, based on the information provided, the student needs to use the given tax rate to adjust the cash flows and calculate the after-tax NPV. Also, the student must account for the salvage value and recovery of net working capital at the end of the 5-year period. Using these adjustments, the NPV can then be calculated using a financial calculator or spreadsheet software equipped with an NPV function.

Answer 2

The NPV of the project is calculated by discounting the future cash flows, which include the initial cost, annual savings, changes in working capital, depreciation tax benefits, and salvage value, at the firm's cost of capital.

Step-by-step explanation:

To calculate the net present value (NPV) of the investment in a high-volume copier, we need to consider the initial outlay, annual savings, changes in working capital, tax benefits from depreciation, salvage value, and the cost of capital.

The initial outlay is $160,000, which can be completely depreciated immediately. The annual after-tax savings from labor costs are $28,000. However, there is an increase in working capital required for paper supplies amounting to $14,000. At the end of the fifth year, the working capital is recovered, and the copier can be sold for $38,000. Using the discount rate of 6% and taking into account the firm's marginal tax rate of 21%, we can discount the future cash flows back to the present value.