SOLUTION A:

1) Initial Investment:

Particulars Press A

Installed Cost of New Press:

Cost of New Process $ 830,000.00
Installation Cost $ 40,000.00

Total Cots - New Press $ 870,000.00

After tax proceeds-Sale of Old Asset:

Proceeds from sale of old process $ (420,000.00)
Tax on sale of old press $ (121,600.00)
Total Proceeds-Sale of Old Process $ (298,400.00) $ (298,400.00)
Change in net working capital $ 90,400.00

Initial Investment $ 662,000.00

Tax on sale of old press

Sale Price $ 420,000.00

Book Value ($400,000 - (0.2 + 0.32 + 0.19) * $400,000) $ (116,000.00)
Gain $ 304,000.00
Tax Rate 40.00%
Tax on sale of old press $ 121,600.00

Change in Net Working Capital

Cash $ 25,400.00
Accounts Receivable $ 120,000.00
Inventory $ (20,000.00)
Increase in Current Assets $ 125,400.00
Increase in Current Liabilities $ (35,000.00)

Increase in Net Working Capital $ 90,400.00

2) Operating Cash Inflows (considered depreciation in year 6)

Press A:
 Year Cost Cost Rate

1 $ 870,000.00 20.00%
2 $ 870,000.00 32.00%
3 $ 870,000.00 19.00%
4 $ 870,000.00 12.00%
5 $ 870,000.00 12.00%
6 $ 870,000.00 5.00%

Press B:

Year Cost Cost Rate

1 $ 660,000.00 20.00%
2 $ 660,000.00 32.00%
3 $ 660,000.00 19.00%
4 $ 660,000.00 12.00%
5 $ 660,000.00 12.00%
6 $ 660,000.00 5.00%

Existing

Year Cost Cost Rate

1 $ 400,000.00 12.00%
2 $ 400,000.00 12.00%
3 $ 400,000.00 5.00%
4 $ -
5 $ -
6 $ -

Operating Cash Inflows

Existing Press

Year EBIT Depreciation

1 $ 120,000.00 $ 48,000.00
 2 $ 120,000.00 $ 48,000.00
3 $ 120,000.00 $ 20,000.00
4 $ 120,000.00 $ 120,000.00
5 $ 120,000.00 $ 120,000.00
6 $ - $ -

Press A

Year EBIT Depreciation

1 $ 250,000.00 $ 174,000.00
2 $ 270,000.00 $ 278,400.00
3 $ 300,000.00 $ 165,300.00
4 $ 330,000.00 $ 104,400.00
5 $ 370,000.00 $ 104,400.00
6 $ - $ 43,500.00

Press B

Year EBIT Depreciation

1 $ 210,000.00 $ 132,000.00
2 $ 210,000.00 $ 211,200.00
3 $ 210,000.00 $ 125,400.00
4 $ 210,000.00 $ 79,200.00
5 $ 210,000.00 $ 79,200.00
6 $ - $ 33,000.00

3)
Terminal Cash Flow (At the end of year 5)

Particulars Press A

Proceeds from sale of old process $ 400,000.00

Tax on sale of new press $ (142,600.00)
Total Proceeds-New Process $ 257,400.00

After tax proceeds-sale of old press:

Proceeds on sale of old press $ 150,000.00
Tax on sale of old press $ (60,000.00)
Total Proceeds-Sale of old press $ 90,000.00 $ (90,000.00)
Change in net working capital $ 90,400.00
 Terminal Cash Flow $ 257,800.00

Tax on sale of old press

Particulars Press A Press B

Sale Price $ 400,000.00 $ 330,000.00

Book Value $ 43,500.00 $ 33,000.00
Gain $ 356,500.00 $ 297,000.00
Tax Rate 40.00% 40.00%
Tax on sale of old press $ 142,600.00 $ 118,800.00

Particulars Press A Press B

Initial Investment $ 662,000.00 $ 361,600.00

Cash Inflows:
Year 1 $ 128,400.00 $ 87,600.00
Year 2 $ 182,160.00 $ 119,280.00
Year 3 $ 166,120.00 $ 96,160.00
Year 4 $ 167,760.00 $ 85,680.00
Year 5 $ 449,560.00 $ 206,880.00

SOLUTION C:

Particulars Press A Press B

Initial Investment $ (662,000.00) $ (361,600.00)

Cash Inflows:
Year 1 $ 128,400.00 $ 87,600.00
Year 2 $ 182,160.00 $ 119,280.00
Year 3 $ 166,120.00 $ 96,160.00
Year 4 $ 167,760.00 $ 85,680.00
Year 5 $ 449,560.00 $ 206,880.00

1) Pay Back of A 4.04

Pay Back of B 3.68

2) Net Present Value of A $35,738.82

Net Present Value of B $ 30,105.88

3) Internal Rate of Return of A 15.85%

Internal Rate of Return of B 17.06%
 SOLUTION E:

1) If the firm has unlimited funds, Press A is preferred.

2) If the firm is subject to capital rationing, Press B is preferred.

SOLUTION F:

The risk would need to be measured by a quantitative technique such as certainty equivalents or risk adjuste
Press B and a decision can be made.

SOLUTION B:

Press A:

$ (662,000.00) $ 128,400.00 $ 182,160.00

0 1 2

Press B:

$ (361,600.00) $ 87,600.00 $ 119,280.00

0 1 2

SOLUTION D:
Press A is preferred when the cost of capital is less than 15% and Press B is preferred when the cost of capi
 Press B

$ 640,000.00
$ 20,000.00

$ 660,000.00

$ (298,400.00)

$ 361,600.00
Depreciation

$ 174,000.00
$ 278,400.00
$ 165,300.00
$ 104,400.00
$ 104,400.00
$ 43,500.00
$ 870,000.00

Depreciation

$ 132,000.00
$ 211,200.00
$ 125,400.00
$ 79,200.00
$ 79,200.00
$ 33,000.00
$ 660,000.00

Depreciation

$ 48,000.00
$ 48,000.00
$ 20,000.00
$ -
$ -
$ -
$ 116,000.00

EBT EAT Cash Flow

$ 72,000.00 $ 43,200.00 $ 91,200.00

$ 72,000.00 $ 43,200.00 $ 91,200.00
$ 100,000.00 $ 60,000.00 $ 80,000.00
$ 72,000.00 $ 72,000.00
$ 72,000.00 $ 72,000.00
$ - $ -

EBT EAT Old Cash Flow Incremental Cash Flow

$ 76,000.00 $ 45,600.00 $ 219,600.00 $ 91,200.00

$ (8,400.00) $ (5,040.00) $ 273,360.00 $ 91,200.00
$ 134,700.00 $ 80,820.00 $ 246,120.00 $ 80,000.00
$ 225,600.00 $ 135,360.00 $ 239,760.00 $ 72,000.00
$ 265,600.00 $ 159,360.00 $ 263,760.00 $ 72,000.00
$ (43,500.00) $ (26,100.00) $ 17,400.00

EBT EAT Old Cash Flow Incremental Cash Flow

$ 78,000.00 $ 46,800.00 $ 178,800.00 $ 91,200.00

$ (1,200.00) $ (720.00) $ 210,480.00 $ 91,200.00
$ 84,600.00 $ 50,760.00 $ 176,160.00 $ 80,000.00
$ 130,800.00 $ 78,480.00 $ 157,680.00 $ 72,000.00
$ 130,800.00 $ 78,480.00 $ 157,680.00 $ 72,000.00
$ (33,000.00) $ (19,800.00) $ 13,200.00

Press B

$ 330,000.00
$ (118,800.00)
$ 211,200.00

$ (90,000.00)
$ 121,200.00

Old Press

$ 150,000.00
$ -
$ 150,000.00
40.00%
$ 60,000.00

Cumulative Cash Flows

Press A Press B
$ (662,000.00) $ (361,600.00)

$ (533,600.00) $ (274,000.00)
$ (351,440.00) $ (154,720.00)
$ (185,320.00) $ (58,560.00)
$ (17,560.00) $ 27,120.00
$ 432,000.00 $ 234,000.00
quivalents or risk adjusted discount rates. The present value could then be compared to

$ 166,120.00 $ 167,760.00 $ 449,560.00

3 4 5

$ 96,160.00 $ 85,680.00 $ 206,880.00

3 4 5
ed when the cost of capital is greater than 15%.