Question: Printing World thinks it may need a new colour printing press. The press will cost $500,000 but will substantially reduce annual operating costs by $215,000

Printing World thinks it may need a new colour printing press. The press will cost $500,000 but will substantially reduce annual operating costs by $215,000 a year, before tax. The press has a 30% CCA rate and will be in its own asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity for Printing World is 12%, the cost of debt is 8%, and the company's target debt-equity ratio is .5. The company's tax rate is 30%.

a. What is the NPV of buying the press?

b. The equipment manufacturer is offering to lease the press for $112,000 a year, for 4 years, payable in advance. Should Printing World accept the offer?

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a Aftertax cost of debt 08 1 3 056 56 DE 5 To convert to DV think of DE as 51 Then V D E 5 1 15 Thus DV 515 13 and EV 23 WACC 13 08 1 3 23 12 00987 987 Assuming that the riskiness of the investment in ... View full answer

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