Reference no: EM132484184

Point 1: There is an opportunity for HGH to purchase a high volume press for a liquidator for a company that has not survived the overseas challenges. The press will enable HGH to reduce costs substantially sue to its efficient processing and enable the company to be competitive with overseas pricing. The cost of the press is $3,200,000. HGH feels it will increase gross profits for the next 3 years by $800,000 in year 1, $1,500,000 in year 2 and $2,000,000 in year 3. In addition to the forecasted gross profit, HGH's operations manager estimates there will be $35,000 per year required in maintenance costs but feels the ease of operating the the new press will enable her to eliminate one operations worker in year 2 and 2 more in year 3

Point 2: The average worker is paid $45,000 per year. Setting up the new press with production down time is expected to have a cost of $280,000. The old printer that would be replaced would have a zero salvage given its age and cost the company $50,000 to disassemble and remove. HGH feels the new press will enable the company to maintain revenue from consulting fees that has averaged $1,250,000 per year from their 4 consultants spread across Canada.

Question 1: Given the volatility of the industry, HGH does not plan beyond 3 years nor can it realistically forecast a salvage value of the press beyond 3 years.

Question 2: Should HGH invest in the new press assuming their expected rate of return is 12%? Provide reasons and you must show your work.