P11-29 (similar to) Question Help Integrative-Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.18 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.98 million 10 years ago, and can be sold currently for $1.15 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.56 million higher than with the existing press, but product costs (excluding depreciation) will represent 52% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS using a 5-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 10.9%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) a. Determine the initial investment required by the new press. b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) c. Determine the payback period. d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press. e. Make a recommendation to accept or reject the new press, and justify your answer. a. Determine the initial investment required by the new press. Calculate the initial investment will be: (Round to the nearest dollar.) Installed cost of new press $ Proceeds from sale of existing press Taxes on sale of existing press Total after-tax proceeds from sale $ Initial investment b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) Calculate the operating cash inflows attributable to the new press below: (Round to the nearest dollar.) Operating Cash Inflows Year 1 Revenues $ Expenses $ $ Depreciation Net profits before taxes $ Taxes $ Net profits after taxes $ Operating cash inflows (Round to the nearest dollar.) Operating Cash Inflows Year 2 Revenues $ $ $ Expenses Depreciation Net profits before taxes Taxes Net profits after taxes $ $ $ Operating cash inflows $ (Round to the nearest dollar.) Operating Cash Inflows Year 3 Revenues $ Expenses $ $ Depreciation Net profits before taxes $ Taxes $ Net profits after taxes $ Operating cash inflows $ (Round to the nearest dollar.) Operating Cash Inflows Year 4 $ $ Revenues Expenses Depreciation Net profits before taxes $ $ Taxes $ Net profits after taxes $ $ Operating cash inflows (Round to the nearest dollar.) Operating Cash Inflows Year 5 $ $ Revenues Expenses Depreciation Net profits before taxes $ Taxes $ $ $ Net profits after taxes Operating cash inflows $ (Round to the nearest dollar.) Operating Cash Inflows Year 6 $ $ Revenues Expenses Depreciation Net profits before taxes Taxes $ $ $ Net profits after taxes $ Operating cash inflows $ c. Determine the payback period. The payback period for this project is years. (Round to one decimal place.) d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press. The net present value is $ (Round to the nearest dollar.) The internal rate of return is %. (Round to one decimal place.) e. Make a recommendation to accept or reject the new press, and justify your answer. (Select from the drop-down menus. Round the NPV amount to the nearest dollar. Round the IRR value to one decimal place.) The NPV is a (1) and the IRR of % is well (2) the cost of capital of 10.6%. Based on both decision criteria, the project (3) be accepted. 1: Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) D Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6 11 4% Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention. ( (1) O positive O negative (2) O above below (3) Oshould not O should