Question

Suppose Jake is hired as a manager for Kinkos printing shop. Jake has to make a managerial decision involving if he should consider either buying equipment – a used colored offset press.

The price of the used colored offset press is $1,000,000. Transporting and installing the press costs another $1,500,000 and will take a year to accomplish. However, once installed, the press will create an estimated additional operating profit of $400,000 per year for eight years, and the salvage value of press at the end of the 9th year will be $500,000.

Thus, Kinkos will pay the $1,000,000 cost of the press immediately and the $1,500,000 for transportation and installation at the end of year one. To keep it simple, let’s assume that Kinkos receives $400,000 in profit received at the end of year two, year three, and so on until the end of year nine, when the last payment is received and the salvage value of the press is $500,000. Answer the following questions with the following discount rates:

If the discount rate is 6 percent, should you buy the press? Why or why not? Explain.

If the discount rate is 10 percent, should you buy the press? Why or why not? Explain.

If the discount rate is 4 percent, should you buy the press? Why or why not? Explain.II. Wranglers Jeans

Answer 1

Page no Decision Decision Discount rate 60p 10% 4% Nρν 224210 - 211640 498570 Buy Not Buy. Buy. if the discount rate is 6%. It is better to Loobuy the Press. I f the discount rate is 10%. Sto not better to buy the press because NPV is negative if Discount rate is 4%-its better to Buy the Press. this is very profitable option. Discount rate 4% should be choose because its NPV more than other options.

Present value of cash inflows will Calculated by the using of followly be formula INPU & - Cro Cltojo CF2 Clar12 CFO Carn 40 E . ( + Y ) Where NPV = Cfo = CFI a r a n a Net Present value cash flow at period cash flow at Period discount rate No. of Periods. o 1 o calculation of NPV at Discount rate 6% Years CF ($) DF 6% PUC$) 0 - 10,00,000 - 10,00, ovo - 15,00, ovo 0.9434 -1415 100 400 000 0.8900 356000 yooouo 0.8396 335840 yoooo 0.7921 316840 400OVO 0.7473 898920 400000 0.7050 282000 yoooo 0.6657 266040 0.6274 400 wo good 23 6760 295950 Net Present value = $224210 e sad to cwro-o 250960 0.5919 0.5919

Page no (111) Calculation of NPU at Discount rate 10% Intial Cost at t-o 10,00 000 + Installation Cost After a year Present value 1500000 80.9091 1 363650 8363650 1939960 Present valul of our flows less: Present value of inflows 400 och X 4.8499 less: Present value of Salvage value growo X 04241 Net Present value 212050 - $211640 Calculation of NPV at Discount gate 44. 10,00,000 Intial Cost at t=0 Add Present value of outflow tal - 1500000 x 0.9615 1442250 a २५५२५७० Total cash outfwws ness! Cash Intwo! PV inflows yourox 6.4738 PV of salvage value 500 wo. X0.7026 2589590 351300 Net present value 498570