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. LI has not been able to compete effectively with larger printers because of its existing older, inefficient presses. The firm is currently having problems cost-effectively meeting run-length requirements as well as meeting quality standards. 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 summarized in what follows:

Old press: Originally purchased 3 years ago at an installed cost of $395,000, 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 $405,000 before taxes; if it is retained, it can be sold to net $130,000 before taxes at the end of 5 years.

Press A: This highly automated press can be purchased for $830,000 and will require $60,000 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 $260,000 before taxes. If this machine is acquired, it is anticipated that the current account changes shown in the following table would result.

CASH	$30,000
ACCOUNTS RECEIVABLE	$90,000
INVENTORIES	($19,000)
ACCOUNTS PAYABLE	$28,000

Press B: This press is not as sophisticated as press A. It costs $610,000 and requires $37,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, it can be sold to net $190,000 before taxes. The acquisition of this press will have no effect on the firm's net-working capital investment. The firm estimates that its earnings before depreciation, interest, and taxes with the old press and with press A or press B for each of the 5 years would be as shown in Table below. The firm is subject to a 20% tax rate. The firm's cost of capital, r, applicable to the proposed replacement is 13%.

EBDT FOR DTI PRESS SCENARIOS

Year	Old Press	Model A	Model B
1	135,000	255,000	214,000
2	135,000	295,000	214,000
3	135,000	305,000	214,000
4	135,000	335,000	214,000
5	135,000	355,000	214,000

Using Excel (and showing formulas), and the template below, please calculate the following:

A. For each of the two replacement presses, calculate:

- Initial Investment

-Operating cash inflows (Note: be sure to consider the depreciation in year 6.)

-Terminal cash flow. (Note: this is at the end of year 5.)

B. Calculate for each alternative the following decision methods:

-Payback Period

-NPV

-IRR

C. Recommend which, if either, of the presses, should be acquired given the following conditions:

-Unlimited funds

-Capital rationing

Model A Model B Cost of Capital Acquisition & Setup: Purchase Price Installation Cost Total Cost of New Tax Rate 5-year MACRS Depreciation Yr 1 20% Yr 2 32% Yr 3 19% Yr 4 12% Yr 5 12% Yr 6 5% Old Stamper Original Installed Cost After Tax Proceeds from Sale of Old: Proceeds from Sale Book Value Tax on Sale After Tax Proceeds Change in NWC Net Working Capital Change Model B Model A Cash A/R Inventory ooo Initial Investment $0 A/P Net Inc in C.A. Increase Liab. Increase NWC See page 150 Cash Outflow Cash Inflow Earings Eamings Operating Cash Inflows Year Existing Stamper Old StamperIncremental Cash Flow Cash Flow EBDT Depreciation Before Tax After Tax Cash Flow Depreciation Schedules Year Stamper Cost Depr. Rate Depreciation (S) New Model A New Model A Total oooooo New Model B 1 New Model B Total OOOOOO Existing/old Stamper Terminal Cash Flows (end of Yr 5) See page 489-491 Model A Model B Total After Tax Proceeds from Sale of A or B stamper: Proceeds from Sale Book Value Tax on Sale After Tax Proceeds Proceeds from Sale of Old (Salvage Value) Tax on Sale Net proceeds from Old Reversion of NWC Terminal Cash Flow $0 Question 2 Relevant Cash Flow for 5-year project (include terminal value in yr 5) Model A Model B Initial Invest. Timeline Model A Cash Flow Period 0 2 Model B Cash Flow Period 0 Question 3 Cumulative Cash Flows Model A Model B Year HNM "Note: Exclude terminal cash flow for year 5 Payback Payback Period* Model A: #whole years + part of next year to recoup the initial investment. Model B: #whole years + part of next year to recoup the initial investment. PV via NPV function Investment NPV NPV Model A Model B IRR function IRR IRR Model A Model B 0.000% 0.000% Model A Model B Cost of Capital Acquisition & Setup: Purchase Price Installation Cost Total Cost of New Tax Rate 5-year MACRS Depreciation Yr 1 20% Yr 2 32% Yr 3 19% Yr 4 12% Yr 5 12% Yr 6 5% Old Stamper Original Installed Cost After Tax Proceeds from Sale of Old: Proceeds from Sale Book Value Tax on Sale After Tax Proceeds Change in NWC Net Working Capital Change Model B Model A Cash A/R Inventory ooo Initial Investment $0 A/P Net Inc in C.A. Increase Liab. Increase NWC See page 150 Cash Outflow Cash Inflow Earings Eamings Operating Cash Inflows Year Existing Stamper Old StamperIncremental Cash Flow Cash Flow EBDT Depreciation Before Tax After Tax Cash Flow Depreciation Schedules Year Stamper Cost Depr. Rate Depreciation (S) New Model A New Model A Total oooooo New Model B 1 New Model B Total OOOOOO Existing/old Stamper Terminal Cash Flows (end of Yr 5) See page 489-491 Model A Model B Total After Tax Proceeds from Sale of A or B stamper: Proceeds from Sale Book Value Tax on Sale After Tax Proceeds Proceeds from Sale of Old (Salvage Value) Tax on Sale Net proceeds from Old Reversion of NWC Terminal Cash Flow $0 Question 2 Relevant Cash Flow for 5-year project (include terminal value in yr 5) Model A Model B Initial Invest. Timeline Model A Cash Flow Period 0 2 Model B Cash Flow Period 0 Question 3 Cumulative Cash Flows Model A Model B Year HNM "Note: Exclude terminal cash flow for year 5 Payback Payback Period* Model A: #whole years + part of next year to recoup the initial investment. Model B: #whole years + part of next year to recoup the initial investment. PV via NPV function Investment NPV NPV Model A Model B IRR function IRR IRR Model A Model B 0.000% 0.000%