Problem:
Quick Printing is considering the purchase of a new printing press. The total installed cost of the press would be $2.2 million. This outlay would be partially offset by the sale of an existing press. The old press which cost $1 million 10 years ago, has zero book value and can be currently sold for $1.5 million before taxes. As a result of the new press, sales in each of the next five years are expected to increase by $1.6 million, but product costs (excluding depreciation) will represent 50% of sales. The new press will not affect the firm's net working capital requirements. The press will be depreciated using the prime cost (straight line) method with an effective life of five years. The firm is subject to a 30% tax rate. The terminal value of the new press and the old press at the end of the next five years will be $0. Quick's cost of capital is 11%.
1) Determine the net present value (NPV) of the proposed project.
2) Determine the internal rate of return (IRR) of the proposed project.
3) Determine the payback period of the proposed project.
4) Determine the profitability index of the proposed project.
5) Considering your results in i - iv above, make a recommendation to accept or reject the project and justify that recommendation.