2. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated...

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2. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated straight-line over 5 years to a salvage value of $20,000. Kinky anticipates that the machine can actually be sold in 5 years for an after-tax amount of $30,000. The machine will save $20,000 a year in labor costs, but will require an increase in working capital initially, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35%, and the discount rate is 8%. Should Kinky buy the machine? Answer: -$8,512 Hint: Depreciation is calculated based on salvage value of $20,000 depreciation = (100,000 - 20,000)/5 = 16,000, while the actual amount sold is 30,000 (in year 5). Also, since the machine save labor cost, we assume that it is the revenue and there is no cost from the project. Year Capital Investment (1) Working Capital Change in Working Capital (WC - WC-1) (2) Operating Cash Flow Revenue Costs Depreciation Pre-tax Income (Revenue - Costs - Depreciation) Taxes (35% pretax income) After-tax Income (Pre-tax income - Taxes) OCF (added Depreciation) (3) Total Cash Flow (1+2+3) Present Values of Cash Flows NPV (sum of all Present Values) 0 1 2 3 4 5 2. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated straight-line over 5 years to a salvage value of $20,000. Kinky anticipates that the machine can actually be sold in 5 years for an after-tax amount of $30,000. The machine will save $20,000 a year in labor costs, but will require an increase in working capital initially, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35%, and the discount rate is 8%. Should Kinky buy the machine? Answer: -$8,512 Hint: Depreciation is calculated based on salvage value of $20,000 depreciation = (100,000 - 20,000)/5 = 16,000, while the actual amount sold is 30,000 (in year 5). Also, since the machine save labor cost, we assume that it is the revenue and there is no cost from the project. Year Capital Investment (1) Working Capital Change in Working Capital (WC - WC-1) (2) Operating Cash Flow Revenue Costs Depreciation Pre-tax Income (Revenue - Costs - Depreciation) Taxes (35% pretax income) After-tax Income (Pre-tax income - Taxes) OCF (added Depreciation) (3) Total Cash Flow (1+2+3) Present Values of Cash Flows NPV (sum of all Present Values) 0 1 2 3 4 5