You are considering the purchase of one of two large

Assignment Help Corporate Finance

Reference no: EM13382001

You are considering the purchase of one of two large presses. The key financial characteristics of the existing press and the two proposed presses are summarised below.

Old press: Originally purchased three years ago at an installed cost of $400 000, it is being depreciated under prime cost (straight-line) using a 10-year recovery period. The old press has a remaining economic life of five years. It can be sold today to net $420 000 before taxes

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 prime cost (straight-line) using a five-year recovery period. At the end of the five years, the machine could be sold to net $400 000 before taxes. If this machine is acquired, it is anticipated that the following current account changes would result.

Cash +$25400
Accounts receivable + 120 000
Inventories -20000
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 prime cost (straight-line) using a five-year recovery period. At the end of five 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 and taxes with the old press and with press A or press B for each of the five years would be as shown in Table 1.

The firm is subject to a 33 per cent tax rate on both ordinary income and capital gains. The firm's cost of capital, k, applicable to the proposed replacement is 14 per cent.

EARNINGS BEFORE DEPRECIATION AND TAXES COMPANY'S PRESSES

483_COMMON STOCK.png

Required

1. For each of the two proposed replacement presses, determine:
a) Initial investment.
b) Net present value.
c) Internal rate of return.

2. Draw NPV profiles for the two replacement presses on the same set of axes, and discuss conflicting rankings of the two presses, if any, resulting from use of NPV and IRR decision techniques.

3. Recommend which, if either, of the presses the firm should acquire

Reference no: EM13382001

Questions Cloud

A firm uses two inputs capital k and labor l in its : a firm uses two inputs capital k and labor l in its production process. capital and labor areperfect complements in

The audience will be a group of people who already work for : the audience will be a group of people who already work for companies that provide a 401k plan so they are familiar

Name and briefly describe one type of policy in which : name and briefly describe one type of policy in which intertemporal preferences over consumption or production is

It is common for organisations which raise finance at the : it is common for organisations which raise finance at the corporate level and then allocate that finance to projects

You are considering the purchase of one of two large : you are considering the purchase of one of two large presses. the key financial characteristics of the existing press

Part ayou have been directed to develop a cost of capital : part ayou have been directed to develop a cost of capital for the firm to use in evaluating 2013 capital investment

Abe forrester and three of his friends from college have : abe forrester and three of his friends from college have interested a group of venture capitalists in backing their

Issue 1 a large number of customers buy our products on a : issue 1 a large number of customers buy our products on a wholesale basis for their sales outlets and have set up

Buckner industries has prepared the condensed forecast : buckner industries has prepared the condensed forecast income statement for the year ending december 31 2002.after

User Account

All Pages