Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.14 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.99 million 10 years ago, and can be sold currently for $1.24 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.54 million higher than with the existing press, but product costs (excluding depreciation) will represent 52% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS table attached, using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.8%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) 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 $2.14 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.99 million 10 years ago, and can be sold currently for $1.24 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.54 million higher than with the existing press, but product costs (excluding depreciation) will represent 52% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS table attached, using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.8%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) 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
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Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.14 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.99 million 10 years ago, and can be sold currently for $1.24
million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.54 million higher than with the existing press, but product costs (excluding depreciation) will represent
52% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS table attached, using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.8%.
(Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.)
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.
Transcribed Image Text:Data table
mine the
e the initi
(Click on the icon hene in order to copy the contents of the data table below into a spreadsheet.)
talled cos
Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
oceeds fro
Percentage by recovery year*
kes on sal
Recovery year
3 years
5 years
7 years
10 years
tal after-ta
1
33%
20%
14%
10%
45%
32%
25%
18%
nitial cash
15%
19%
18%
14%
7%
12%
12%
12%
this cyc
12%
9%
9%
21, 20
5%
9%
8%
9%
7%
8
4%
6%
9.
6%
10
6%
11
4%
Totals
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
convention.
iew an exa
eck answer
Print
Done
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