Question

All parts are under 1 question therefore they can be answered per your policy.

1. You are seeking approval for the purchase of a new printing press. The new press is estimated to cost $80,000; sales tax is estimated to be $4,000; transportation and installation is estimated to be $5,000, and operator training is estimated to be $2,000. The new press will have an expected life of 20 years. After 20 years the press will be retired and its future market value is estimated to be $5,000. When placed in-service, this new press is projected to produce additional annual revenues of $30,000 the first year increasing by 5% each year thereafter over the its expected 20-year life. Overhead and maintenance expenses are estimated to be $4,000 the first year increasing by $500 each year thereafter over its expected 20-year life. Given that your company’s MARR is 15%, you decide to perform a present worth analysis.

1. Show your cash flow diagram (neatness and detail count).
2. What is the PW evaluated at MARR in dollars? (Show all your work).
3. Based on your PW analysis, should you recommend this purchase for funding? Be specific
4. Given that the company cannot reinvest its revenues at a rate greater than MARR, what is your calculated ERR (external rate of return) evaluated at Ꜫ=15%?

Answer 1

Cash out flow in the beginning of the year

Cost=80,000

Sales Tax=4,000

Transportation and Installation= 5,000

Training=2,000

Total=91,000

Net cash inflow Sales inflow has been increased by 5% in every year and maintenance expense have been increased by 500 every year

NPV=PV of Cash inflows- PV of cash outflow

=209841.92-91000

b=1,18,841.92

c We recommend investing as the NPV of the project is positive.

a. cashflowsD. Answer would have been same even if revenue have been re-invsted because discounting and compounding would have been done at the rate of 15% only.

If rate of reinvest is lesser than 15% than NPV would go down but still it is an profitable investment