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After reviewing specifications and quotations for a new Printing Press, Jim Cousteau, Project Engineer at New Britain Printing LLC ( NBP ) has narrowed it
After reviewing specifications and quotations for a new Printing Press, Jim Cousteau, Project Engineer at New Britain Printing LLC NBP has narrowed it down to one, ABC Converting Equipment Inc., for $ John Smith, CEO of NBP is asking him to evaluate the investment and make recommendations.
Jim estimates that the site preparation and installation would cost $ in addition to $ which would cover the expenses of ABC engineers who will assist in the installation and training of the workforce. Luckily it has been determined to be installed in the existing facility. No building investment would be required. Peter Thompson, the Printing Manager, asked Jim to include the required tooling for $ To start production NBP will need to purchase an additional $ in raw materials inventory to commission the equipment and cover customer commitments in the first couple of months.
Peter told Jim that being a new type of equipment, the first year of operation would be one of learning and experimenting; consequently, productionsales would not be up to the desired level, and more material would be wasted until its operators achieve a level of efficiency, reflected in the table below:
Income Statement
Revenue
Expenses
Labor
Material
O&M Energy
When Jim Cousteau was collecting all the information for his project feasibility analysis, Marketing, and the Controller provided him estimated values in todays dollars Y
John Smith told Jim Cousteau that he knows that once that first year has passed, he expects the sales to increase year over year, starting in year NBPs union has recently signed a contract for for the next years. The ratio of Labor to Revenue will be assumed to be the same as in year
The company Directors negotiated a $ a tenyear amortized loan at backed by the local government to promote industrial growth in the area. The remaining will be selffinanced by NBP They The Directors have set a market rate of return of at least for the first five years of the projects life.
The Printing Press will be depreciated according to the sevenyear MACRS, and the printing tooling as per the threeyear MACRS. However, Jim knows that the press will last well over ten years; therefore, he is not considering a salvage value for the press for this analysis. The tooling is different due to wear and tear; it is estimated that all tooling will need to be replaced after three years. The tooling will be sold as scrap metal for $todays dollars
You may assume the press would have a salvage value in year of of its original cost.
The company's marginal tax rate is No Tax is paid on negative net income.
The expected average inflation rate is expected to be
In Excel, prepare the Income Statement followed by the Cash Flow Statement to determine the projects aftertax cash flows in actual dollars.
Determine the cash flows in constant dollars.
Determine the Inflationfree real IRR on the investment.
Do you think Jim Cousteau should recommend this project? Why?
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