Project Evaluation Kinky Copies
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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 can actually be sold in 5 years at $30,000. The machine will save $20,000 a year in labor costs but will require an increase in working captial, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35 percent, and the discount rate is 8 percent. Should Kinky's buy this machine?
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The initial investment is $100,000 for the copier plus $10,000 in working capital, for a total outlay of $110,000.
Depreciation expense = ($100,000 - $20,000)/5 = $16,000 per year
The project saves $20,000 in annual labor costs, so the net operating cash flow (including ...
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