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 $2,650,000. John Smith, CEO of NBP, is now asking him to evaluate the investment and make recommendations.

Jim estimates that the site preparation and installation would cost $350,000 in addition to $65,000.00, which would cover the expenses of ABC engineers who will assist in the installation and training of the workforce. Luckily it has been determined that it can 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 $265,000. To start production NBP will need to purchase an additional $315,000 in raw materials inventory to 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, production/sales 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	1	2
Revenue	$3,000,000	$5,500,000
Expenses
Labor	$463,050	$476,478
Material	$1,725,000	$1,802625
O&M, Energy	$1,035,000	$1,071,225

John Smith told Jim Cousteau that he knows that once that first year has passed, he expects the sales to increase 6.50% year over year, starting in year 2; the industrial indicators show that raw materials prices will increase at a rate of 4.5%; and O&M and energy at 3.5%. Their union contract has set the labor increases at 2.9%.

The company Directors have already negotiated a $2,000,000.00 partially funded by a ten-year amortized loan at 8%, backed by the local government to promote industrial growth in the area. The remaining will be self-financed by NBP. They (The Directors) have set a market rate of return of at least 20% for the first five years of the projects life.

The Printing Press will be depreciated according to the seven-year MACRS, and the printing tooling as per the three-year 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 $22,500 (today's dollars).

The company's marginal tax rate is 35%.

The expected average inflation rate is expected to be 4.5%.

a. In Excel, prepare the Income Statement followed by the Cash Flow Statement to determine the projects after-tax cash flows in actual dollars.

b. Determine the cash flows in constant dollars.

c. Determine the Inflation-free (real) IRR on the investment.

d. Do you think Jim Cousteau will recommend this project? Why?