Investing to stay competitive Asia Print plc is a large printing firm offering a range of services to industry, such as printed catalogues, leaflets and brochures. It operates in a very competitive market as it is relatively easy for new firms to join using the latest computer software page-making packages. In an effort to maintain market share, the directors of Asia Print plc are considering several new investment projects. The two most promising schemes are: Project Y a newly designed highly automated Japanese-built printing press with fast changeover facilities and full-colour capability. Direct internet links with customers would allow for rapid input of new material to be printed. Two highly trained operatives will be required and this would mean 6 redundancies from existing staff. Project Z a semi-automated German-built machine with a more limited range of facilities but with proven reliability. Existing staff could operate this machine but there would be three redundancies. It is very noisy and local residents might complain. The finance director was asked to undertake an investment appraisal of these two machines. He had gathered the following data. Each additional unit produced would be sold for an average of $1.25 but there would be additional variable costs of $0.5 per unit. In addition, the annual operational cost of the two machines is expected to be $1 million for Y and $0.5 million for Z. The introduction of either machine would involve considerable disruption to existing production. Staff would have to be selected and trained for project Y and the trade union was very worried about potential job cuts. The residual value of Y is expected to be $1 million and of Z, $0.5 million. Project Y Project Z Purchase price ($m) 20 Expected life expectancy 5 years Forecast annual sales (m.units) 8

Project Z Purchase price ($m) 12 Expected life expectancy 4 years Forecast annual sales (m.units) 6 Answer the following questions: 1. Calculate the forecast annual cash flows from the information given. 2. Present all relevant data in a table and calculate the simple payback period for both projects. 3. Calculate the ARR for both projects. Comment on your results 4. The business has a cut-off criterion rate of 7% for all new projects. Would either project be acceptable with this restriction? Explain your answer. 5. Calculate the next present value for both projects. The companys existing cost of borrowed capital is 12%. 6. IRR of Project Y 9% and Project Z- 14%, comment on the results and explain which project a manager should select. 7. Using your results for all four methods of investment appraisal, write a report to the directors to advise them which project they should opt for, on the basis of quantitative information. 8. To what extent do you think qualitative factors should influence investment decisions such as this one by Asia Print plc?