Integrative-Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.26 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.09 million 10 years ago, and can be sold currently for $1.29 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.59 million higher than with the existing press, but product costs (excluding depreciation) will represent 50% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS E using a 5-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.5%. (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 investment required by the new press. b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) c. Determine the payback period.

Question
Integrative-Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.26 million. This outlay would be partially offset by the sale of
an existing press. The old press has zero book value, cost $1.09 million 10 years ago, and can be sold currently for $1.29 million before taxes. As a result of acquisition of the new press, sales in each of the next 5
years are expected to be $1.59 million higher than with the existing press, but product costs (excluding depreciation) will represent 50% of sales. The new press will not affect the firm's net working capital requirements.
The new press will be depreciated under MACRS E using a 5-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.5%. (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 investment required by the new press.
b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)
c. Determine the payback period.

Image Transcription

Integrative-Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.26 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.09 million 10 years ago, and can be sold currently for $1.29 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.59 million higher than with the existing press, but product costs (excluding depreciation) will represent 50% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS E using a 5-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.5%. (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 investment required by the new press. b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) c. Determine the payback period.

Expert Answer

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Finance

Capital Budgeting

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Explain how the futures markets can be used to reduce interest rate risk and input price risk.

A: Futures market helps to lock the future price of commodity now . It is an auction market where buyin...

Q: Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelv...

A: Formulas:

Q: You are interested in Speculative Holdings which is currently trading at a market price of R4.2 per ...

A: Excel Spreadsheet: Excel Workings:

Q: Sizo Business Solutions, an industrial business concern, is financed by equity, debt and preference ...

A: Total debt is the total value of all bonds. Value of each bond equals to its price i.e. present valu...

Q: Your firm is interested in selling a new type of headphone. The machinery to build these headphones ...

A: Break-even point is the point wherein revenues equals expenses or contribution equals fixed costs. I...

Q: You are given the following information regarding UFSK limited, a listed entity. Number of out...

A: 1. Dividend per share = Dividend paid / Number of shares Dividend per share = $120,000 / 100,000 Div...

Q: Suppose you are looking for some investment opportunities in the stock market.  1. You observe that ...

A: The investor shouldn’t agree with his friend because according to the given situation such that Goog...

Q: Summarize the basic procedure of Net-Present-Worth Criterion?

A: Step 1: Initially ascertain the initial investment of the initial outlay amount (CF0). The initial ...

Q: 23) Dumo is a trader at ZNF Equity traders and has just identified a stock, UFSI Limited, which is c...

A: a)  The strategy worked by Dumo is protective put investment strategy. A protective put position is ...