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Integrative—Complete investment decision    Wells Printing is considering the purchase of a new printing press. The total...

Integrative—Complete investment decision   

Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.11 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book​ value, cost $1.02 million 10 years​ ago, and can be sold currently for $1.28 million before taxes. As a result of acquisition of the new​ press, sales in each of the next 5 years are expected to be $1.57 million higher than with the existing​ press, but product costs​ (excluding depreciation) will represent 46% of sales. The new press will not affect the​ firm's net working capital requirements. The new press will be depreciated under MACR

Rounded Depreciation Percentages by Recovery Year Using MACRS for

First Four Property Classes

Percentage by recovery​ year*

Recovery year

3 years

5 years

7 years

10 years

1

33​%

20​%

14​%

10​%

2

45​%

32​%

25​%

18​%

3

15​%

19​%

18​%

14​%

4

7​%

12​%

12​%

12​%

5

12​%

9​%

9​%

6

5​%

9​%

8​%

7

9​%

7​%

8

4​%

6​%

9

6​%

10

6​%

11

4​%

Totals

100​%

100​%

100​%

100​%

​*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax​ purposes, be sure to apply the actual unrounded percentages or directly apply​ double-declining balance​ (200%) depreciation using the​ half-year convention.

using a​ 5-year recovery period. The firm is subject to a 40% tax rate. Wells​ Printing's cost of capital is 11.1%.​(Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year​ 6.)

a. Determine the initial investment required by the new press.

b. Determine the operating cash flows attributable to the new press.​ (Note: Be sure to consider the depreciation in year​ 6.)

c. Determine the payback period.

d. Determine the net present value​ (NPV) and the internal rate of return​ (IRR) related to the proposed new press.

e. Make a recommendation to accept or reject the new​ press, and justify your answer.

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