STUDY CASE 6

Kelompok 10 :

1. Amara Anamika Putri 130321153

2. Samuel Moses Hadi Siswanto 130321161
3. Reynard Antoni Rianto 130322088
4. Christalyne Andrea Tantono 130222203

Study Case 6
Lasting Impressions Company
Lasting Impressions (LI) Company is a medium-sized, privately owned commercial printer
of promotional advertising brochures, booklets, and other direct-mail pieces. The firm’s major
clients are ad agencies based in New York and Chicago. The typical job is characterized by high
quality and production runs of more than 50,000 units. LI has not been able to compete effectively
with larger printers because of its existing older, inefficient presses. The firm is currently having
problems meeting run length requirements as well as meeting quality standards in a cost- effective
manner. The general manager has proposed the purchase of one of two large, six-color presses
designed for long, high-quality runs. The purchase of a new press would enable LI to reduce its
cost of labor and therefore the price to the client, putting the firm in a more competitive position.
The key financial characteristics of the old press and of the two proposed presses are summarized
as follows.

Old press Originally purchased 3 years ago at an installed cost of $400,000, it is being
depreciated under MACRS, using a 5-year recovery period. The oldpress has a remaining
economic life of 5 years. It can be sold today to net $420,000 before taxes; if it is retained,
it can be sold to net $150,000 before taxes at the end of 5 years.

Press A This highly automated press can be purchased for $830,000 and will require
$40,000 in installation costs. It will be depreciated under MACRS, using a 5-year recovery
period. At the end of the 5 years, the machine could be sold to net 400,000 before taxes. If
this machine is acquired, it is anticipated that the current account changes shown in the
following table would result.
 Cash + $ 25,400
Accounts receivable + 120,000
Inventories - 20,000
Accounts payable + 35,000

Press B This press is not as sophisticated as press A. It costs $640,000 and requires $20,000
in installation costs. It will be depreciated under MACRS, using a 5-year recovery period.
At the end of 5 years, it can be sold to net $330,000 before taxes. Acquisition of this press
will have no effect on the firm’s net working capital investment.

The firm estimates that its earnings before depreciation, interest, and taxes with the old press and
with press A or press B for each of the 5 years would be as shown in the table at the top of the next
page. The firm is subject to a 40% tax rate. The firm’s cost of capital, r, applicable to the proposed
replacement is 14%.
TO DO
a. For each of the two proposed replacement presses, determine:
(1) Initial investment.
(2) Operating cash inflows. (Note: Be sure to consider the depreciation in year 6.)
(3) Terminal cash flow. (Note: This is at the end of year 5.)

b. Using the data developed in part a, find and depict on a timeline the relevant cash flow stream
associated with each of the two proposed replacement presses, assuming that each is terminated at
the end of 5 years.

c. Using the data developed in part b, apply each of the following decision techniques:
(1) Payback period. (Note: For year 5, use only the operating cash inflows that is, exclude terminal
cash flow—when making this calculation.)
(2) Net present value (NPV).
(3) Internal rate of return (IRR).

d. Draw net present value profiles for the two replacement presses on the same set of axes, and
discuss conflicting rankings of the two presses, if any, resulting from use of NPV and IRR decision
techniques.

e. Recommend which, if either, of the presses the firm should acquire if the firm has
(1) unlimited funds or (2) capital rationing.

f. The operating cash inflows associated with press A are characterized as very risky, in contrast
to the low-risk operating cash inflows of press B. What impact does that have on your
recommendation?
Answers :

A. Diketahui
Old press :
Installed cost OA = $400.000
N = 5 tahun
Sale of old asset = $420.000

Press A :
Cost of NA = $830.000
Installation cost = $40.000
N = 5 tahun
Sale of new asset = $400.000
Account receivable = $120.000
Inventories = (20.000)
Account payable = $35.000

Press B :
Cost of NA = $640.000
Installation cost = 20.000
Sale of new asset = $330.000

(1)Initial investment

Press A
→ Installed cost of new asset = $870,000

→ (-) After tax proceed from sale of OA = ($298,400)

→ (+) Change in net working capital = $90.400

Initial investment = $662.000

● Installed cost of NA :
Installed cost of NA = 830.000 + 40.000
= 870.000
 ● After tax proceeds from sale of OA :
Installed cost of OA = $400.000
BV OA = $400.000 - [(20%+32%+19%) x $400.000]
= $400.000 - [71% x $400.000]
= $400.000 - $284.000
= $116.000
420.000 - 116.000 = 304.000
Tax Liability = $304.000 x 40% = $121.600
After tax proceed = 420.000 - 121.600 = 298.400
● Change in network capital :
NWC = current asset - current liabilities
= (A/R + inventories) - A/P
= (25.400 + 120.000 + (-20.000)) - 35.000
= 90.400
Press B
Rumus Initial Investment Replacement =
→ Installed cost of new asset = $660.000

→ (-) After tax proceed from sale of OA = ($298.400)

→ (+) Change in net working capital = $0

Initial investment = $36.600

● Installed cost of NA :
Installed cost of NA = 640.000 + 20.000
= 660.000
● After tax proceeds from sale of OA :
Installed cost of OA = $400.000
BV OA = $400.000 - [(20%+32%+19%) x $400.000]
= $400.000 - [71% x $400.000]
= $400.000 - $284.000
= $116.000
 420.000 - 116.000 = 304.000
Tax Liability = $304.000 x 40% = $121.600
After tax proceed = 420.000 - 121.600 = 298.400
● Change in net working capital : 0

(2)Operating cash inflows :

Old press
Incremental cash flow

(3)Terminal cash flow

Press A
After tax proceeds from sales of NA = $340.920
(-) after tax proceeds from sale of OA = ($289,400)
(+) change in net working capital = $90.400

Terminal cash flow = $141.920

● After Tax Proceed Sale of NA

Installed cost of NA = $870,000
BV NA = 870,000 - ((20% + 32% + 19% ) x 870,000) = $252.300
400,000 - 252.300 = 147.700
Tax Liability = 147.700 x 40% = $59.080
After tax proceed = 400,000 - 59.080= $340.920

● After Tax Proceed From Sale of Old Asset

BV OA = 400,000 - [(20% + 32% + 19%)] x 400,000 = $116,000
$420,000-116,000 = $304,000
Tax liability = 304,000 x 40% = 121,600
After tax proceed = 420,000 - 121,600 = $289,400

● Change in Net Working Capital

Change in NWC = Current Asset - Current Liabilities
= (A/R + Inventories) - A/P
= (25.400 + 120.000 + (-20.000)) - 35.000
= 90.400
 Press B
● After Tax Proceed Sale of NA
Installed cost of NA = $660,000
BV NA = 660,000 - ((20% + 32% + 19%) x 660,000) = $ 191.400
330,000 - 191.400 = $138.600
Tax Liability = 138.600 x 40% = $55.440
After tax proceed = 330,000 - 55.440 = $274.560
● After Tax Proceed From Sale of Old Asset
BV OA = 400,000 - [(20% + 32% + 19%)] x 400,000 = $116,000
$420,000-116,000 = $304,000
Tax liability = 304,000 x 40% = 121,600
After tax proceed = 420,000 - 121,600 = $289,400
● Change in Net Working Capital
Change in WWC = 90.400

After-tax proceeds from sale of new asset = $274.560

(-) After tax proceed from sale of OA = ($289,400)
(+) Change in net working capital = $0
_________________________________________________________________ +
Terminal Cash Flow = $-14840

B.
Press A
0 1 2 3 4 5

-662.000 128.400 182.160 166.120 167.760 449.560

Press B
0 1 2 3 4 5

-361.600 87.600 119.280 96.160 85.680 206.880

 C.
a. Payback Period
→ Press A
662.000
(128.400) year 1

533.600
(182.160) year 2

351.440
(166.120) year 3

185.320
(167.760) year 4

17.560 : 449.560 = 0,03

0,03 x 12 bulan = 0,36 bulan
0,36 x 30 hari = 10,8
Jadi, PP press A adalah 4 tahun 10 hari

Payback Period Press B :

361.600
(87.600) year 1

274.000
(119.280) year 2

154.720
(96.160) year 3

58.560 : 85.680 = 0,68

0,68 x 12 = 8,16 bulan
0,16 bulan x 30 hari = 4,8 hari
Jadi, PP press B adalah 3 tahun 8 bulan 4 hari

● Jadi, Payback Period paling menguntungkan ada pada New Machine Press B yaitu
selama 3 tahun 8 bulan 4 hari.
b. NPV
→ Press A
[𝐶𝐹1] [𝐶𝐹2]
NPV = ( ) + ((1+𝑘)2 )+. . ..) - CF0
(1+𝑘)1
[128.400] [182.160] [166.120] [167.120] [449.560]
= (((1+14%)1 ) + ((1+14%)2 ) + ((1+14%)3 ) + ((1+14%)4 ) + ((1+14%)5)) - 662.000

= $35359,88491/35.359,89

→ Press B
[𝐶𝐹1] [𝐶𝐹2]
NPV = ( ) + ((1+𝑘)2 )+. . ..) - CF0
(1+𝑘)1
[87.600] [119.280] [96.160] [85.680] [206.880]
= (((1+14%)1 ) + ((1+14%)2 ) + ((1+14%)3 ) + ((1+14%)4 ) + ((1+14%)5)) - 361.600
= $30105,8805/30.105,88

● Jadi, NPV paling menguntungkan ada pada New Machine Press A yaitu sebesar
$35.359,89.

c. IRR
→ Press A
IRR
50%_____________________________IRR_________________________14%
NPV ($71,935.05) 0 $455,698.83

[𝐶𝐹1] [𝐶𝐹2]
NPV = ( ) + ((1+𝑘)2 )+. . ..) - CF0
(1+𝑘)1
[250,000] [270,000] [300,000] [330,000] [370,000]
= (((1+50%) ) + ((1+50%) ) + ((1+50%) ) + ((1+50%) ) + ((1+50%) )) - CF0
1 2 3 4 5

= 286,666.6 +202,798.35 -561,400

= ($71,935.05)

𝑥 − 𝑥1 𝑦 − 𝑦1
=
𝑥2 − 𝑥1 𝑦2 − 𝑦1
𝑥 − 25% 0 − (−71,935.05)
=
14% − 25% 411,969.72 − (−71,935.05)
X = 24,81%
 → Press B
IRR
25%_______________________________IRR_____________________________14%
-7,286.4 0 $434,547

Apabila IRR sebesar 25%, maka NPV menjadi =

1
[1− ]
(1+𝑘)𝑛
● (
NPV = 𝑃𝑀𝑇 𝑥 ) - 286,400
𝑘
1
[1− ]
(1+25%)5
= (120,000 x ) - 286,400
25%
= ($36,313.6)
𝑥 − 25% 0 − (−36,313.6)
=
14% − 25% 434,547 − (−36,313.6)
X = 0,1413
X = 14.13%

d.
New Machine Press A New Machine Press B

Payback 4 tahun 10 hari 3 tahun 8 bulan 4 hari

Period

NPV $35.359,89 $30.105,88

IRR 24,81% 14.13%

e. (1) Unlimited Funds

Apabila perusahaan memiliki unlimited Funds, maka kami merekomendasikan untuk
mengambil Mesin baru press A dan juga press B karena kedua mesin tersebut akan
memberikan keuntungan untuk perusahaan.
 (2) Capital Rationing
Apabila perusahaan memiliki capital rationing, maka kami merekomendasikan untuk
mengambil Mesin baru press A karena keuntungan yang diberikan oleh mesin press A lebih
besar daripada keuntungan yang diberikan oleh mesin press B.

f. Sesuai dengan prinsip investasi, bahwa high risk high return, maka :
● Jika memilih Press A = sehingga perusahaan dapat kehilangan cash inflow lebih
lebih banyak dari pada Press B atau bisa mendapatkan cash inflow lebih banyak
dari pada Press B
● Jika memilih press B = sehingga perusahaan dapat kehilangan cash inflow lebih
sedikit dari pada Press A atau bisa mendapatkan cash inflow lebih sedikit dari pada
press A.

Pada poin sebelumnya, kami merekomendasikan, jika perusahaan telah mengkalkulasi proyeksi di
masa yang akan datang dan yakin dengan kondisi optimis, maka perusahaan bisa memilih Press
A, tetapi jika kondisi ekonomi di masa yang akan datang adalah pesimis, maka perusahaan bisa
memilih Press B untuk mengurangi resiko.