Question 02:

One such investment is whether to update their analogue printer to a digital. This will have a number of benefits both financially and in providing improvements to the quality of their product. The analogue printer was purchased three years ago at the commencement of the business. At the time it cost $175,000 and had an expected life of 8 years. The printer will be fully depreciated using straight line and will have no resale value. It currently takes two people per shift to operate and a new digital machine would require just one person. This could provide a saving of $50,000 per year. Further, the current machine requires annual maintenance costing $10,000 per year. If the new digital printer is purchased, the old analogue printer could be sold for $60,000. The new machine will cost $150,000 and has an expected life of 5 years. It will also be fully depreciated and have no value at the end of its life. The new printer will require a different quality of paper which will cost an additional $15,000 per annum. The current cost of capital is 8% and the tax rate is 30% and payable within the same year. The new machine will also require annual maintenance at a cost of $5,000.

Required (Calculations using Excel Spreadsheet):

a. Advise management whether they should replace their current printer.

b. Discuss what factors should be considered before purchasing the new printer.

c. What external factors will influence the firm's cash flows?