Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.11 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.05 million 10 years ago, and can be sold currently for $1.13 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.67 million higher than with the existing press, but product costs (excluding depreciation) will represent 53% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 11.2%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) a. Determine the initial cash flow required by the new press. b. Determine the periodic cash inflows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) c. Determine the payback period. d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press. e. Make a recommendation to accept or reject the new press, and justify your answer.
Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.11 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.05 million 10 years ago, and can be sold currently for $1.13 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.67 million higher than with the existing press, but product costs (excluding depreciation) will represent 53% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 11.2%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) a. Determine the initial cash flow required by the new press. b. Determine the periodic cash inflows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) c. Determine the payback period. d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press. e. Make a recommendation to accept or reject the new press, and justify your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.11 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.05 million 10 years ago, and can be sold currently for $1.13 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.67 million higher than with the existing press, but product costs (excluding depreciation) will represent 53% of sales. The new press will not affect the firm's net working capital requirements. The new press will be
|
Percentage by recovery year*
|
||||
|
Recovery year
|
3 years
|
5 years
|
7 years
|
10 years
|
|
1
|
33%
|
20%
|
14%
|
10%
|
|
2
|
45%
|
32%
|
25%
|
18%
|
|
3
|
15%
|
19%
|
18%
|
14%
|
|
4
|
7%
|
12%
|
12%
|
12%
|
|
5
|
|
12%
|
9%
|
9%
|
|
6
|
|
5%
|
9%
|
8%
|
|
7
|
|
|
9%
|
7%
|
|
8
|
|
|
4%
|
6%
|
|
9
|
|
|
|
6%
|
|
10
|
|
|
|
6%
|
|
11
|
|
|
|
4%
|
|
Totals
|
100%
|
100%
|
100%
|
100%
|
using a five-year recovery period. The firm is subject to a 40%
tax rate. Wells Printing's cost of capital is 11.2%.
(Note: Assume that the old and the new presses will each have a terminal value of $0
at the end of year 6.)
tax rate. Wells Printing's cost of capital is 11.2%.
(Note: Assume that the old and the new presses will each have a terminal value of $0
at the end of year 6.)
a. Determine the initial cash flow required by the new press.
b. Determine the periodic cash inflows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)
c. Determine the payback period.
d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press.
e. Make a recommendation to accept or reject the new press, and justify your answer.
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