Question1

Evan Incorporated has been operating a printing and design business for 3 years and currently the

business is generating $500,000 in net cash flows per annum and has a number of investment

opportunities available to them. 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.

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

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