A.

Point of View
In this case we will use the point of view of the financial adviser of the company
who will provide assessments to the proposals given.

B. Statement of the Problem

The problem will be to determine the following:
● Initial investment
● Operating cash inflows (considered depreciation in year 6)
● Terminal Cash Flow (At the end of year 5)

C. Objective
● To be able to determine the initial investment and cash flows associated with
each alternative with the use of capital budgeting.
● To be able to analyze and compare the alternatives given using payback period,
discounted payback period, net present value, and internal rate of return.

D. Areas of Consideration
● Initial investment, the relevant cash outflow for a proposed project at time zero.
● The initial investment associated with a proposed capital expenditure.
● Operating cash inflows, the incremental after-tax cash inflows resulting from
implementation of a project during its life.
● Terminal cash flow, the after-tax non operating cash flow occurring in the final
year of a project. It is usually attributable to liquidation of the project.
● Net present value (NPV) gives explicit consideration to the time value of money,
it is considered a sophisticated capital budgeting technique.
● The internal rate of return (IRR) is the discount rate that equates the NPV of an
investment opportunity with $0 (because the present value of cash inflows equals
the initial investment). It is the compound annual rate of return that the firm will
earn if it invests in the project and receives the given cash inflows.
 E. Alternative Courses of Action

Option A : Retain old press

Option B : Purchase Press A
Option C : Purchase Press B

Initial Investment

Proceeds from old Press

Sale Price 420,000.00
Tax on Sale 121,920.00
Opportunity Cost 298,080.00

1
Tax on Sale

Sale Price 420,000.00

Book Value 115,200.00
Gain on sale 304,800.00
Tax Rate 40%
Tax on Sale 121,920.00

Change in Net Working Capital

Current Assets

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 90,400.00

Capital

2
NET OPERATING CASH FLOW

Depreciation of Equipment Option A Option B Option C

Old Press Press A Press B

400,000.00 870,000.00 660,000.00

Year 1 20.00% 174,000.00 132,000.00

Year 2 32.00% 278,400.00 211,200.00

Year 3 19.20% 167,040.00 126,720.00

Year 4 11.52% 46,080.00 100,224.00 76,032.00

Year 5 11.52% 46,080.00 100,224.00 76,032.00

Year 6 5.76% 23,040.00 50,112.00 38,016.00

100.00% 115,200.00 870,000.00 660,000.00

3
INCREMENTAL OPERATING CASH FLOW

4
TERMINAL CASH FLOW

5
6
NET PRESENT VALUE

7
 F. Conclusions and Recommendations

Option A Option B Option C

Old Press Press A Press B

Payback Period 3.5 Years 4.10 Years 3.69 Years

Discounted Payback Period 4.62 Years 4.85 Years 4.72 Years

Net Present Value 32,293.87 35,564.36 30,065.99

IRR 17.31% 14.96% 16.21%

The firm should acquire Press A since it will bring the company with higher

operating cash flow or income in the next 5 years. Though the payback period is longer

than Press B, but 5-6 months longer is not that significant in the business industry if that

will benefit more of the company. Also, the IRR of 14.96% is already in the acceptable

stage.