LASTING IMPRESSIONS COMPANY
A.
For each of the two proposed replacement presses, determine:
(1) Initial investment.
Installed cst ! ne" #$ess Cost of new press Installation cost Total Cost - New Press A!te$+ta, #$ceeds+sale ! ld asset Proceeds from sale of old press Ta" on sale of old press Total proceeds-sale of old press Can%e in net wor&in% capital Initial investment
$420,000.00! #2#,600.00! %(-&/.)
PRESS A
PRESS B
$ 8 3 0 ,0 0 0 . 0 0 4 0 , 0 0 0 .0 0 %&'.
$ 6 4 0 ,0 0 0 .0 0 2 0 ,0 0 0 .0 0 %**.
%(-&/.) $'0,400.00 %**-.
%(-&/.) %0*1*.
Ta, n sale ! ld #$ess (ale Price )oo& *al+e $ 400,000 - .20 .32 .#'! " $400,000 /ain Ta" ate 401! Ta, n sale ! ld #$ess
$420,000.00 ##6,000.00! $304,000.00 4 01 $#2#,600.00
Cm#tatin !$ C2an3e in net "$4in3 ca#ital Cas cco+nts eceia5le Inentor Increase in c+rrent assets Increase in c+rrent lia5ilities Increase net wor&in% capital
$2,400.00 #20,000.00 20,000.00! $#2,400.00 3,000.00! $'0,400.00
(2) Operating cash inflows (considered depreciation in year 6)
E,istin3 # 2 3 4 6
$400,000.00 $400,000.00 $400,000.00
Cst Rate 0.#2 0.#2 0.0
5e#$eciatin $48,000.00 $48,000.00 $20,000.00
$##6,000.00
P$ess A # 2 3 4 6
P$ess B # 2 3 4 6
$870,000.00 $870,000.00 $870,000.00 $870,000.00 $870,000.00 $870,000.00
Cst Rate 0.20 0.32 0.#' 0.#2 0.#2 0.0
5e#$eciatin $#74,000.00 $278,400.00 $#6,300.00 $#04,400.00 $#04,400.00 $43,00.00 $870,000.00
$660,000.00 $660,000.00 $660,000.00 $660,000.00 $660,000.00 $660,000.00
Cst Rate 0.20 0.32 0.#' 0.#2 0.#2 0.0
5e#$eciatin $#32,000.00 $2##,200.00 $#2,400.00 $7',200.00 $7',200.00 $33,000.00 $660,000.00
(0) Te$minal Cas2 6l" (At t2e end ! 7ea$ 8) PRESS A
PRESS B
$400,000.00 #42,600.00! %-8'/.
$330,000.0 ##8,800.00 %-11-.
'0,000.00!
'0,000.00
A!te$ ta, #$ceed !$m sale ! ne" #$ess Proceeds of sale of new press Ta" on sale of new press Total Proceeds-new press A!te$+ta, #$ceeds+sale ! ld #$ess 9 Proceeds on sale of old press Ta" on sale of old press Total proceeds-sale of old press
$#0,000.00! 60,000.00! '0,000.00!
C2an3e in net "$4in3 ca#ital Te$minal Cas2 !l"
$'0,400.00 %-8'&.
Cm#tatin !$ Ta, n sale ! ne" #$ess PRESS A $400,000.00 $43,00.00! $36,00.00 401 $#42,600.00
(ale price )oo& *al+e r 6! /ain Ta" ate 401! Ta, n sale ! ne" #$ess
PRESS B $330,000.00 $33,000.00! $2'7,000.00 401 $##8,800.00
Computation for Tax on sale of old press
(ale price )oo& *al+e r 6! /ain Ta" ate 401! Ta, n sale ! ld #$ess:: Initial Inestment ear # ear 2 ear 3 ear 4 ear 9
$#0,000.00 0.00 $#0,000.00 401 $60,000.00 PRESS A $662,000.00 Cas2 In!l" $#28,400.00 $#82,#60.00 $#66,#20.00 $#67,760.00 $44',60.00
PRESS B $36#,600.00 Cas2 In!l" $87,600.00 $##',280.00 $'6,#60.00 $8,680.00 $206,880.00
$#'#,760.00 $27,800.00 $44',60.00
$8,680.00 $#2#,200.00 $206,880.00
: :peratin% cas flow Terminal cas inflow Cas inflows ear 9
B. Using
the data developed in Part A, find and depict on a time line the relevant cash
flow stream associated with each of the two proposed presses, assuming that each is terminated at the end of 5 years .
Operating Cash Inows
$0.00 %1-1-.
$182,160.00 $128,400.00
0
1
$167,760.00 $166,120.00
2
$449,560.00
3
4
5
6
End of Year
Operating Cash Inows
$119,280.00 $87,600.00
0
1
$85,680.00 $96,160.00
2
3
$206,880.00
4
5
6
End of Year
C.
Using the data developed in Part B, apply each of the following decision techniques ;
ear # ear 2 ear 3 ear 4 ear
C;MM;LATIS PRESS A PRESS B $#28,400.00 $87,600.00 $3#0,60.00 $206,880.00 $476,680.00 $303,040.00 $644,440.00 $388,720.00 $#,0'4,000.00 $',600.00 Pa7?ac4 #e$id
P$ess A 4 ears 662,000 - 644,440!<#'#,760 = 4 #7,600<#'#,760! = 4 0.'#78 @ / 7ea$s
P$ess B 3 ears 36#,600 - 303,040!<8,680 = 3 8,60<8,680! = 3 .68347 @ 0 & 7ea$s
E.
Recommend which, if either, of the presses the firm should acquire if the firm has !"
unlimited funds or #" capital rationing$ %he firm should acquire Press A if they have unlimited funds, &ut if the firm is su&'ect to capital rationing, then the firm should choose to acquire Press B over Press A. F$
(hat is the impact on your recommendation of the fact that the operating cash
inflows associated with Press A are characteri)ed as a very contrast to the low*ris+ operating cash inflows of press B
%a+ing the ris+ levels into account, - would have to elect to recommend the lower ris+ option that Press B presents $- would prefer to ta+e lower ris+ &ut more guaranteed" operating cash inflows that it would provide$ %he ris+ would need to &e measured &y a quantitative technique such as certainty equivalents or ris+*ad'usted discount rates$ %he resultant present value could then &e compared to Press B and a decision made$
