Nuggets Printing is considering the purchase of a replacement printing press. The total

installed cost of the press is $ $2\mathrm{.}2$ million. This outlay will be partially offset by the sale

of an existing press. The old press has zero net book value, cost $$1$ million ten years

ago and can be sold currently for $ $0\mathrm{.}2$ million before taxes. As a result of acquiring the

new press, sales in each of the next five years are expected to increase by $ $1\mathrm{.}6$ million

but product costs, excluding depreciation, will represent fifty percent of sales. The new

press will require that creditors be upped by four hundred thousand dollars and debtors

increase by six hundred thousand dollars. The replacement printing press will also be

depreciated using a straight line method to a residual value of three hundred thousand

dollars but will only fetch two hundred and fifty thousand dollars on the market. Investing

in such assets attracts a Special Initial Allowance $($SIA$)$ of twenty five percent of the

installed cost to be spread equally over the useful life of the asset. The firm is subject to

a twenty percent tax rate on both ordinary income and capital gains. Wells Printing cost

of capital is eighteen percent per annum. Assume that depreciation is tax deductible.

Required

Advise the company on whether it should take on board the replacement printing press

or not, giving reasons. Use the Profitability Index Approach. $(40$ marks$)$