Books Box Co $($BB$)$ prints $5\mathrm{.}4$ million copies every year for in$-$house use with a self$-$

operated "Magica Antilux" copy machine. A single copy costs $1$ cent $(0\mathrm{.}01).$ 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$\text{'}$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 $4\mathrm{.}6\%$ p$.$a$.$ Expected inflation is $3\mathrm{.}6\%$ 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? $(6$p$)$

b$)$ What is the NPV of copying in$-$house $($considered independently$)?(3$p$)$

c$)$ What is the NPV of outsourcing $($considered independently$)?(3$p$)$

d$)$ Should BB continue in$-$house copying or outsource it$?$ Motivate. $(1$p$)$ please turn page