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Project Evaluation by NPV Method

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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 actually can be sold in 5 years for $30,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35 percent, and the discount rate is 8 percent.
Should Kinky buy the machine?

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Solution Summary

Solution describes working of steps needed to determine whether a project is acceptable or not by using NPV method.

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Please refer attachment for complete details. Table may not print properly here.
Solution:

Depreciation= (Price of machine-Salvage Value)/No. of years = (100000-20000)/5=$16000.

At the end Savings Depreciation Profit Before Tax @35% Net Cash Inflow Extra Cash Total Inflow PV
of Year Tax (Savings-Tax) Inflow* After Tax Rate=8%
1 20000 16000 4000 1400 18600 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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