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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.
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 firm's 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 Printing's 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. Question 2 2. Determine the annual after tax cash inflows attributable to the press from year 1 to 4 Question 3 3. Determine the after tax cash flow on year 5 . ASSUMING the project's IRR is 25%, the discount rate should be above 25% for the project to have a PW higher than zero True False Question 5 4. 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 ? Question 6 inflation rate is 8% annually? (Answer in 4 decimal places)
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