Nuggets printing is considering the purchase of a replacement printing press. The total installed cost of the press is $$2,200,000.$ This outlay will be partially offset by the sale of an existing press. The old press has zero Net Book Value, it cost $$1,000,000$ ten years ago and can be sold currently for $$200,000$ before taxes. As a result of acquiring the new press, sales in each of the five years are expected to increase by $$1,600,000$ but product costs, excluding depreciation will represent $50$ percent of sales. The new press will require that creditors be upped by $$400,000$ and debtors increase by $$600,000.$ The replacement printing press will also be depreciated using a straight line method to a residual value of $$300,000$ but will only fetch $$250,000$ on the market. Investing in such an asset attracts a Special Initial Allowance of $25\%$ of the installed costs to be spread equally over the useful life of the asset The firm is subject to a $20\%$ 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.

Advise the company on whether it should take on board the replacement printing press or not, giving reasons. Use the Profitability Index approach.

Based on the information provided, let's analyze whether Nuggets Printing should invest in the replacement printing press using the Profitability Index approach.

Use the method of calculating and presenting the

Sale Value of Old Press

Cash outflow from Purchase Cost of New Printing Press

Depreciation of New Press

Reccuring Cash Flows

New Press Terminal Value

Working Capital

Summarise by giving the PV of Cash Inflows and PV of Cash Outflows and the resultant PI$.$

Also show and explain how to find the Annuity Factor @$18\%$ for $5$ years as well as the PV factors @$18\%$ for $5$ years