Please Help!!!! I am in Need by 4/5!!!!!! Project Evaluation. Kinky Copies may b
ID: 2770768 • Letter: P
Question
Please Help!!!! I am in Need by 4/5!!!!!! Project Evaluation. Kinky Copies may buy ahigh-volume copier. The machine costs $100,000 and will bedepreciated straight-line over 5 years to a salvage value of$20,000. Kinky anticipates that the machine actually can be sold in5 years for $30,000. The machine will save $20,000 a year in laborcosts but will require an increase in working capital, mainly papersupplies, of $10,000. The firm's marginal tax rate is 35 percent,and the discount rate is 8 percent. Should Kinky buy themachine? Please Help!!!! I am in Need by 4/5!!!!!! Project Evaluation. Kinky Copies may buy ahigh-volume copier. The machine costs $100,000 and will bedepreciated straight-line over 5 years to a salvage value of$20,000. Kinky anticipates that the machine actually can be sold in5 years for $30,000. The machine will save $20,000 a year in laborcosts but will require an increase in working capital, mainly papersupplies, of $10,000. The firm's marginal tax rate is 35 percent,and the discount rate is 8 percent. Should Kinky buy themachine?Explanation / Answer
Machine Costs = $100,000
Number of years = 5 years
Salvage Value = $20,000
Depreciation = [MachineCost – Salvage Value] / Number of years
Depreciation = [$100,000 -$20,000] / 5
The Machine Saves $20,000 in annual labor costs.
Operating Cash flow = $20,000 (1-0.35) + ($16,000 * 0.35)
$30,000 – ($10,000 * 35%) = $26,500
Working Capitalreleases = $10,000
Initial Investment (I) = $100,000 + $10,000 =$110,000
NPV = ($18,600 * 3.9927) + ($36,500 / 1.4693) - $110,000
NPV = $74,264.22 + $24,841.76 - $110,000
NPV = $99,105.98 - $110,000
NPV = -$10,894.02