IntegrativeComplete investment decision

Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.11 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.02 million 10 years ago, and can be sold currently for $1.28 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.57 million higher than with the existing press, but product costs (excluding depreciation) will represent 46% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACR

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.

using a 5-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 11.1%.(Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.)

a. Determine the initial investment required by the new press.

b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)

c. Determine the payback period.

d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press.

e. Make a recommendation to accept or reject the new press, and justify your answer.