Lasting Impressions Company

Lasting Impressions (LI) Company is a medium-sized commercial printer of promotional

advertising brochures, booklets, and other direct-mail pieces. The firm's major clients are ad

agencies based in New York and Chicago. The typical job is characterised by high quality and

production runs of more than 50,000 units. LI has not been able to compete effectively with

larger printers because of its existing older, inefficient presses. The firm is currently having

problems meeting run length requirements as well as meeting quality standards in a cost-effective

manner. The general manager has proposed the purchase of one of two large, six-color

presses designed for long, high-quality runs. The purchase of a new press would enable LI to

reduce its cost of labor and therefore the price to the client, putting the firm in a more

competitive position. The key financial characteristics of the old press and of the two proposed

presses are summarised in what follows.

Old press. Originally purchased 3 years ago at an installed cost of $400,000, it is being

depreciated under MACRS using a 5-year recovery period. The old press has a remaining

economic life of 5 years. It can be sold today to net $420,000 before taxes; if it is retained, it can

be sold to net $150,000 before taxes at the end of 5 years.

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 MACRS using a 5-year recovery period. At the

end of the 5 years, the machine could be sold to net $400,000 before taxes. If this machine is

acquired, it is anticipated that the current account changes shown in the following table would

result.

\fEarnings before Depreciation, Interest, and Taxes for Lasting Impressions Company's Presses Year Old press Press A Press B 20,000 250,000 S 210,000 N 120,000 270,000 210,000