Wells printing is considering the purchase of a new printing press. The total installed cost of the press is $2,130,000. This outlay would be partially offset by the sale of an exising press. The old press has zero book value, cost of $1.06 million dollars 10 years ago, and can be sold currently for $1.21 million before taxes. As a result of acquistion of the new press, sales in each of the next 5 years are expected to be $1.62 million higher than with the expisting press, but product costs (excluding the depreciation) will represent 45% of sales. The new press will not afect the firms net working capital requirements. The new press will be depreciated under MACRS using a 5-year recovery period (20%, 32%, 19%, 12%, 12% and 5% respectively). The firm is subject to a 40% tax rate. Wells Printing cost of capital is 11.5%. (Note: assume that the old and new presses will each have a terminal value of $0 at the end of year 6.)
a.) Determine the initial investment required by the new press.
Initial investment will be :
Installed cost of new press $ Proceeds from sale of existing press $ Taxes on sale of existing press $ Total after-tax proceeds from sale $ Initial investment $
b.) Determind the operating cash inflows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)
year 1 2 3 4 5 6 Revenues Expenses Depreciation Net profits before taxes Taxes Net profits after taxes Operating cash inflows
c.) determine the payback period
Wells printing is considering the purchase of a new printing press. The total installed cost of the press is $2,130,000. This outlay would be partially offset by the sale of an exising press. The old press has zero book value, cost of $1.06 million dollars 10 years ago, and can be sold currently for $1.21 million before taxes. As a result of acquistion of the new press, sales in each of the next 5 years are expected to be $1.62 million higher than with the expisting press, but product costs (excluding the depreciation) will represent 45% of sales. The new press will not afect the firms net working capital requirements. The new press will be depreciated under MACRS using a 5-year recovery period (20%, 32%, 19%, 12%, 12% and 5% respectively). The firm is subject to a 40% tax rate. Wells Printing cost of capital is 11.5%. (Note: assume that the old and new presses will each have a terminal value of $0 at the end of year 6.)
a.) Determine the initial investment required by the new press.
Initial investment will be :
| Installed cost of new press | $ | |
| Proceeds from sale of existing press | $ | |
| Taxes on sale of existing press | $ | |
| Total after-tax proceeds from sale | $ | |
| Initial investment | $ |
b.) Determind the operating cash inflows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)
| year | 1 | 2 | 3 | 4 | 5 | 6 |
| Revenues | ||||||
| Expenses | ||||||
| Depreciation | ||||||
| Net profits before taxes | ||||||
| Taxes | ||||||
| Net profits after taxes | ||||||
| Operating cash inflows |
c.) determine the payback period
