Wells Printing is considering expanding its business by purchasing a printing press. The cost of the press is $2 million. Installation costs amount to $200,000. As a result of acquisition of the press, sales in each of the next 5 years are expected to be $1.6 million from this new line of business, but product costs (excluding depreciation) will represent 50% of sales. The press will not affect the firms net working capital requirements. The press will be depreciated under a straight line method using a 5-year recovery period. The firm is subject to a 40% tax rate. Wells Printings cost of capital is 11%. (Note: Assume that the press will have a salvage value of $110,000 at the end of year 5.)

1., Determine the initial investment required by the press.

2. Determine the annual after tax cash inflows attributable to the press from year 1 to 4

3. Determine the after tax cash flow on year 5.

4. ASSUMING the projects IRR is 25%, the discount rate should be above 25% for the project to have a PW higher than zero

Group of answer choices

True

False

5. Assuming that at the very last minute, you are able to sell the equipment for 200,000 (without altering the book value). What is the cash flow on year 5?

6. An investor lends $10,000 today, to be repaid in a lump sum at the end of 10 years with interest at 10% (= Im) compounded annually. What is the real rate of return, assuming that the general price inflation rate is 8% annually?