Books Box Co (BB) prints 5.4 million copies every year for in-house use with a self-...

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Books Box Co (BB) prints 5.4 million copies every year for in-house use with a self- operated "Magica Antilux" copy machine. A single copy costs 1 cent (0.01€). The copier fixed costs include copy assistant Tim's wage, plus printing cartridges and service for a total of 145000€ per year before tax. The Magica has an expected remaining life of 5 years and has now a second-hand market value of 35000€ net after tax. After 5 years' use its value is expected to be zero. The book value of the Magica is now 100000€ and it will be fully depreciated with equal annual instalments over its remaining life of 5 years. BB's tax rate is 20%. The company weighted average cost of capital is 10% p.a. in nominal terms. The nominal risk-free rate is 4.6% p.a. Expected inflation is 3.6% p.a. BB is considering stopping the in-house copying and selling the Magica, instead outsourcing the corresponding copying to Copiox Co for an annual fee of 225000€. All costs are fully tax deductible: BB has sufficient profits to allow full tax deductions. The direct copy costs, the fixed costs, and the outsourcing fee are expressed as current values but are subject to inflation over the time horizon of 5 years. All cost items are estimated to have low risk and to be virtually unaffected by changes in the overall economic development. Should BB keep on copying in-house or sell the copier and outsource the copying to Copiox? Specifically, answer: a) What is the incremental NPV of outsourcing the copying to Copiox instead of keeping doing it in-house? (6p) b) What is the NPV of copying in-house (considered independently)? (3p) c) What is the NPV of outsourcing (considered independently)? (3p) d) Should BB continue in-house copying or outsource it? Motivate. (1p) Books Box Co (BB) prints 5.4 million copies every year for in-house use with a self- operated "Magica Antilux" copy machine. A single copy costs 1 cent (0.01€). The copier fixed costs include copy assistant Tim's wage, plus printing cartridges and service for a total of 145000€ per year before tax. The Magica has an expected remaining life of 5 years and has now a second-hand market value of 35000€ net after tax. After 5 years' use its value is expected to be zero. The book value of the Magica is now 100000€ and it will be fully depreciated with equal annual instalments over its remaining life of 5 years. BB's tax rate is 20%. The company weighted average cost of capital is 10% p.a. in nominal terms. The nominal risk-free rate is 4.6% p.a. Expected inflation is 3.6% p.a. BB is considering stopping the in-house copying and selling the Magica, instead outsourcing the corresponding copying to Copiox Co for an annual fee of 225000€. All costs are fully tax deductible: BB has sufficient profits to allow full tax deductions. The direct copy costs, the fixed costs, and the outsourcing fee are expressed as current values but are subject to inflation over the time horizon of 5 years. All cost items are estimated to have low risk and to be virtually unaffected by changes in the overall economic development. Should BB keep on copying in-house or sell the copier and outsource the copying to Copiox? Specifically, answer: a) What is the incremental NPV of outsourcing the copying to Copiox instead of keeping doing it in-house? (6p) b) What is the NPV of copying in-house (considered independently)? (3p) c) What is the NPV of outsourcing (considered independently)? (3p) d) Should BB continue in-house copying or outsource it? Motivate. (1p)

Answer rating: 100% (QA)

a Incremental NPV of outsourcing Inhouse NPV 263500 see b Outsourcing NPV ... View the full answer