XXX Company is a medium-sized, privately owned printing company. The major clients are ad agencies in Indonesia and Brunei. The typical job is characterized by high quality and production runs of more than 50,000 units. XXX Company has not been able to compete effectively with larger printers because of its older, inefficient presses. The firm is currently having problems meeting run length requirements as well as meeting quality standards in a cost-effective manner.

The general manager has proposed the purchase of one or two large, six-color presses designed for long, high quality runs. The purchase of a new press would enable XXX Company to reduce its cost of labour and therefore the price to the client, putting the firm in a more competitive position. The key financial characteristics of the old press and of the two proposed presses are summarized as follows:

Old Press: Originally purchased 3 years ago at an installed cost of RM400,000, it is being depreciated using straight line method. The old press has a remaining economic life of 5 years. It can be sold today to net $420,000 before taxes, if it is retained, it can be sold to net RM150,000 before taxes at the end of 5 years.

Press A: This highly automated press can be purchased for RM830,000 and will require RM40,000 in installation costs. It will be depreciated under straight line method. At the end of the year 5, the machine could be sold to net RM400,000 before taxes. If this machine is acquired, it is anticipated that the current account changes shown in the following table would result.

Cash	+RM25,4000
Accounts receivable	+ 120,000
Inventories	20,000
Account payable	+ 35,000

Press B: This press is not sophisticated as Press A. It costs RM640,000 and requires RM20,000 in installation costs. It will be depreciated using straight line methods, 5 years. At the end of 5 years, it can be sold to net RM330,000 before taxes. Acquisition of this press will have no effect on the firms net working capital investments.

The firm estimates that its earnings before depreciation, interest and taxes with the old press and with Press A or Press B for each of the 5 years would be as shown in the following table. The firm is subject to a 40% tax rate. The firms cost of capital, r, applicable to the propsoed replacement is 14%.

Earnings before Depreciation, Interest And Taxes for XXX Companys Press
Year	Old Press (in RM000)	Press A (in RM000)	Press B (in RM000)
1	120	250	210
2	120	270	210
3	120	300	210
4	120	330	210
5	120	370	210

Questions:

1. For each of the two proposed replacement presses, determine:

1. Initial investment
2. Operating cash inflows
3. Terminal Cash Flow

2. Using the data developed in Part A, find and depict on a timeline the relevant cash flow stream associated with each of the two proposed replacement presses, assuming that each terminated at the end of 5 years.

3. Using the data developed in Part B, apply each the following decision techniques:

1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)

4. Draw NPV profiles for the two replacement presses on the same set of axes, and discuss conflicting rankings of the two passes, if any, resulting from use of NPV and IRR decision technique.

5. Recommend which, if either, of the prosses the firm should acquire if the firm has:

1. Unlimited funds
2. Capital Rationing

6. The operating cash flows associated with Press A are characterized as very risky, in contrast to the low-risk operating cash inflows of press B. What impact does that have on your recommendations?