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

Question

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 firms marginal tax rate is 35 percent, and the discount rate is 8 percent. Should Kinky buy the machine?

Answer 1

Kinky should not buy this machine based on these numbers:

I cam up with a negative NPV of about $38,000.

Initial outlay/wc required = $109,000 negative pv.

Annual After tax savings plus the tax effect on depreciation amounts to $71,000 positive pv.

The net is a negative npv of $38,000

Hope this helps, mule.