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Integrative Case 5 Lasting Impressions Company Listing Impressions (LI) Company is a medium-sized commercial printer of promotional advertising brochures, booklets, and other direct mail proces. The firm's major clients are ad agencies based in New York and Chicago. The typical job is characterized by high quality and production runs of more than 50,000 units. LI has not been able to compete effectively with larger printers because of its existing older, inefficient presses. The firm is currently having problems meeting run length requirements as well as meeting quality standards in a cost-effective manner The general manager has proposed the purchase of one of two largo, six color presses designed for long high quality runs The purchase of a new press would enable to reduce its cost of labor and therefore the price to the client, putting the firm in a more competitive position The key financial characteristics of the old press and of the two proposed presses are summarzed in what follows Old prose Originally purchased 3 years ago at an installed cost of $400,000, it is being deprecated under MACRS using a 5-year recovery period The old press has a remaining economic life of 5 years it can be sold today to not $420,000 before taxes if it is retained. It can be sold to not $150,000 botore taxes at the end of 5 years Press A This highly automated press can be purchased for $630.000 and will require $40,000 in installation costs it will bo depreciated under MACRS using a 5-year recovery period At the end of the 5 years, the machine could be sold to net 5400,000 before taxes if this machine is acquired, it is anticipated that the current account changes shown in the following table would result auto Press A This highly automated press can be purchased for $830,000 and will require $40,000 in installation costs It will be depreciated under MACRS using a 5-year recovery period. At the end of the 5 years, the machine could be sold to net $400,000 before taxes. If this machine is acquired, it is anticipated that the current account changes shown in the following table would result Cash + S 25,400 Accounts receivable + 120,000 Inventones - 20.000 Accounts payable - 35.000 Press B This press is not as sophisticated as press A. It costs $640,000 and requires $20,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, it can be sold to net $330.000 before taxes Acquisition of this press will have no effect on the firm's net working capital investment The firm estimates that its earnings before depreciation interest and taxes with the old press and with press A or press B for each of the 5 years would be as shown in the table at the top of the next page The firm is subject to a 40% tax rate The firm's cost of capital, r applicable to the proposed replacement is 10% The timestimates that its earnings before depreciation interest, and taxes with the old press and with press A or press B for each of the 5 years would be as shown in the table at the top of the next page The firm is subject to a 40% tax rate The firm's cost of capital, applicable to the proposed replacement is 14% Earnings before Depreciation, Interest, and Taxes for Lasting Impressions Company's Presses Press A Year Old press Press B 0 $120.000 $250.000 $210.000 2 120,000 270,000 210,000 3 120,000 300.000 210,000 120.000 330.000 210.000 120.000 370.000 210.000 For each of the two proposed replacement presses, determine (1) Intal investment (2) Operating cash inflows. (Note. Be sure to consider the depreciation in year 6 ) (3) Torminal cash flow (Note: This is at the end of year 5.) Using the data developed in part a, find and depict on a timeline the relevant cash flow stream associated with each of the two proposed replacement presses, assuming that each is terminated at the end of 5 years Using the data developed in part b, apply each of the following decision techniques (1) Payback period (Note: For year 5 use only the operating cash infliows--that is exclude terminal cash flow-when making this calculation) (2) Net present value (NPV) (3) Internal rate of return (IRR) Drawnie prosent value profiles for the two replacement presses on the same set of exos, and discuss conflicting rankings of the two presses, if any. resulting from use of NPV and IRR decision techniques Recommend which if either of the presses the form should acquire if the firm has (1) unlimited funds or (2) Capital rationing The operating cash inflows associated with press A are characterized as very risky in contrast to the low.risk operating cash inflows of press B What impact does that have on your recommendation? Integrative Case 5 Lasting Impressions Company Listing Impressions (LI) Company is a medium-sized commercial printer of promotional advertising brochures, booklets, and other direct mail proces. The firm's major clients are ad agencies based in New York and Chicago. The typical job is characterized by high quality and production runs of more than 50,000 units. LI has not been able to compete effectively with larger printers because of its existing older, inefficient presses. The firm is currently having problems meeting run length requirements as well as meeting quality standards in a cost-effective manner The general manager has proposed the purchase of one of two largo, six color presses designed for long high quality runs The purchase of a new press would enable to reduce its cost of labor and therefore the price to the client, putting the firm in a more competitive position The key financial characteristics of the old press and of the two proposed presses are summarzed in what follows Old prose Originally purchased 3 years ago at an installed cost of $400,000, it is being deprecated under MACRS using a 5-year recovery period The old press has a remaining economic life of 5 years it can be sold today to not $420,000 before taxes if it is retained. It can be sold to not $150,000 botore taxes at the end of 5 years Press A This highly automated press can be purchased for $630.000 and will require $40,000 in installation costs it will bo depreciated under MACRS using a 5-year recovery period At the end of the 5 years, the machine could be sold to net 5400,000 before taxes if this machine is acquired, it is anticipated that the current account changes shown in the following table would result auto Press A This highly automated press can be purchased for $830,000 and will require $40,000 in installation costs It will be depreciated under MACRS using a 5-year recovery period. At the end of the 5 years, the machine could be sold to net $400,000 before taxes. If this machine is acquired, it is anticipated that the current account changes shown in the following table would result Cash + S 25,400 Accounts receivable + 120,000 Inventones - 20.000 Accounts payable - 35.000 Press B This press is not as sophisticated as press A. It costs $640,000 and requires $20,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, it can be sold to net $330.000 before taxes Acquisition of this press will have no effect on the firm's net working capital investment The firm estimates that its earnings before depreciation interest and taxes with the old press and with press A or press B for each of the 5 years would be as shown in the table at the top of the next page The firm is subject to a 40% tax rate The firm's cost of capital, r applicable to the proposed replacement is 10% The timestimates that its earnings before depreciation interest, and taxes with the old press and with press A or press B for each of the 5 years would be as shown in the table at the top of the next page The firm is subject to a 40% tax rate The firm's cost of capital, applicable to the proposed replacement is 14% Earnings before Depreciation, Interest, and Taxes for Lasting Impressions Company's Presses Press A Year Old press Press B 0 $120.000 $250.000 $210.000 2 120,000 270,000 210,000 3 120,000 300.000 210,000 120.000 330.000 210.000 120.000 370.000 210.000 For each of the two proposed replacement presses, determine (1) Intal investment (2) Operating cash inflows. (Note. Be sure to consider the depreciation in year 6 ) (3) Torminal cash flow (Note: This is at the end of year 5.) Using the data developed in part a, find and depict on a timeline the relevant cash flow stream associated with each of the two proposed replacement presses, assuming that each is terminated at the end of 5 years Using the data developed in part b, apply each of the following decision techniques (1) Payback period (Note: For year 5 use only the operating cash infliows--that is exclude terminal cash flow-when making this calculation) (2) Net present value (NPV) (3) Internal rate of return (IRR) Drawnie prosent value profiles for the two replacement presses on the same set of exos, and discuss conflicting rankings of the two presses, if any. resulting from use of NPV and IRR decision techniques Recommend which if either of the presses the form should acquire if the firm has (1) unlimited funds or (2) Capital rationing The operating cash inflows associated with press A are characterized as very risky in contrast to the low.risk operating cash inflows of press B What impact does that have on your recommendation