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XYZ Printing Press is a medium sized commercial
Max Marks: 20XYZ PressXYZ Printing Press is a medium sized commercial printing firm. The firm mainly prints advertising brochures, booklet, and some other direct mail materials. The firmâs major clients are ABC and DEF based advertising agencies. The firm has its printing press in ABC. For the last so many years the firm has been facing the problems of quality and cost effectiveness and hence was not able to compete in the market.The general manager of the firm has proposed the purchase of one of two large six color printing machines designed for long, high quality runs. The purchase of new asset will enable the firm to reduce its cost of labor and therefore the price to the client. The key financial characteristics of the two proposed printing machines are summarized as follows: Printing Machine A: This highly automated printing machine can be purchased for Rs.830,000 and will require Rs.40,000 in installation cost. It will be depreciated under MACRS using a 5 years recovery period. The initial investment required for this machine is Rs. 662,000.Net cash inflows for this machine have been calculated as follow:Year 01Year 02Year 03Year 04Year 05Rs.219,600Rs.273,360Rs.246,120Rs.239,760Rs.263760Printing Machine B: This machine is not as sophisticated as machine A. It costs Rs.640,000 and requires Rs.20,000 in installation cost. It will be depreciated under MACRS using a 5 years recovery period. The initial investment for this machine is Rs. 361,600. Net cash inflows for this machine have been calculated as follow:Year 01Year 02Year 03Year 04Year05Rs.178,800Rs.210,480Rs.176,160Rs.157,680Rs.157,680The firm is subject to a 40% tax rate on both ordinary income and capital gains. The firmâs cost of capital, k, applicable to the proposed projects is 14 percent. RequiredA. Depict on a time line the relevant cash flow streams associated with each of the two proposed replacement machines assuming that each is terminated at the end of 5 years.B. Using the data (Financial Characteristics) relevant to Machine A and Machine B, Calculate(1) Payback Period(2) Net Present Value (NPV)(3) Internal Rate of Return (IRR) For both the machines. C. Recommend which, if any, of the two machines the firm should acquire. Support your answer with proper explanation. The firm is subject to a 40% tax rate on both ordinary income and capital gains. The firmâs cost of capital (k) applicable to the proposed replacements is 14 percent.
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