Lasting Impressions Company (LI) is a medium-sized commercial printer of promotional advertising brochures, booklets, and other direct-mail pieces. The firms major clients are New York- and Chicago- based ad agencies. The typical job is characterized by high quality and production runs of over 50,000 units. LI has not been able to complete 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 the two new presses are summarized 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 5 years, the machine can be sold to net $400,000 before taxes. If this machine is acquired, it is anticipated that the following current account changes would result. Cash Accounts Receivable Inventories Accounts Payable + $25,000 + 120,000 - 20,000 + 35,000 Press B This press is not as sophisticated as press A. It costs $640,000 and requires $20,000 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 $330,000 before taxes. Acquisition of this press will have no effect on the companys net working capital investment. The firm estimates that its profits before depreciation and taxes with the old press and with press A or press B for each of the 5 years would be as follows in Table 1. The firm is subject to a 40% tax rate on both ordinary income and capital gains. The firms cost of capital, k, applicable to the proposed replacement is 14%, 1 Table 1 Profits Before Depreciation and Taxes for Lasting Impressions Companys Presses Year 1 2 3 4 5 Old Press $120,000 120,000 120,000 120,000 120,000 Press A $250,000 270,000 300,000 330,000 370,000 Press B $210,000 210,000 210,000 210,000 210,000 presses, determine sure to consider the depreciation in year 6.) at the end of year 5.) REQUIRED a. For each of the two proposed replacement a. Initial investment b. Operating cash inflows (Note: Be c. Terminal cash flow (Note: This is b. Using the data developed in a, find and depict on a time line the relevant cash flow stream associated with each of the two proposed replacement presses, assuming that each is terminated at the end of 5 years. c. Using the data developed in b, apply each of the following decision techniques: a. Payback Period. (Note: For year 5, use only the operating cash inflowsexclude terminal cash flowwhen making this calculation.) b. Net Present V alue (NPV) c. Internal Rate of Return (IRR) d. Draw net present value profiles for the two replacement presses on the same set of axes, and discuss the conflicting rakings of the two presses, if any, resulting from use of NPV and IRR decision techniques. e. Recommend which, if either, of the presses the firm should acquire if the firm has (1) unlimited funds or (2) capital rationing. f. What is the impact on your recommendation on the fact that the operating cash flows associated with press A are characterized as very risky in contrast to the low-risk operating cash inflows of press B?