Final answer:
The NPV of the copier project for Kinky Copies, after considering the machine's cost, depreciation, annual after-tax savings, additional working capital, salvage value, and discount rate, is $26,767.16. With a positive NPV, it would be advantageous for Kinky Copies to invest in the high-volume copier.
Step-by-step explanation:
To determine the net present value (NPV) of the copier project for Kinky Copies, we must consider the initial outlay, the annual after-tax savings, the increase in working capital, the salvage value at the end of Year 5, and the tax implications. First, we will calculate the NPV of the project using the initial cost, after-tax cash flows, tax savings from depreciation, and the terminal cash flows when the copier is sold and the working capital is recovered.
The initial outlay is the cost of the machine minus the tax savings from immediate full depreciation, which is $100,000 times the tax rate of 21%. The annual after-tax savings amount to $20,000 minus the increase in working capital. The terminal cash flows in Year 5 consist of the salvage value of $30,000 plus the recovery of net working capital of $10,000.
Here is a breakdown of the calculation:
- Initial Outlay = $100,000 - ($100,000 * 21%) = $79,000
- Annual After-Tax Savings = $20,000 (Years 1-5)
- Net increase in Working Capital = -$10,000 (initial) + $10,000 (recovered in Year 5)
- Terminal Cash Flow in Year 5 = $30,000 + $10,000
- Discount Rate = 8%
Next, we'll calculate the present value (PV) of the cash flows using the discount rate:
- PV of Annual Savings for Years 1-5 = $20,000 x (1 - (1 / (1 + 0.08)^5)) / 0.08 = $79,168.93
- PV of Terminal Cash Flows in Year 5 = ($30,000 + $10,000) / (1 + 0.08)^5 = $26,598.23
Finally, the NPV can be calculated as:
NPV = - Initial Outlay + PV of Annual Savings + PV of Terminal Cash Flows = -$79,000 + $79,168.93 + $26,598.23 = $26,767.16
Since the NPV is positive, it is financially beneficial for Kinky Copies to undertake the project.