A company has been paying $ 18,000 to a printer to print the monthly newsletter
company. The printing contract just expired but may be renewed for an additional 5 years. It anticipated that the new contract costs are 12% higher than the previous contract.
The company is also considering buying a system of “desktop publishing” a printer
high quality laser controlled by a high performance microcomputer. With the “software” appropriate, the newsletter could be developed and printed with quality equivalent to that of the printing. Also you can buy a special machine to print photos in the newsletter, so that the final product is similar to that provided by the commercial printer.
The provider of computing and printing equipment has provided the following cost estimates to the company:
Personal Computer $ 4.500
6,500 color laser printer
“Scanner” and photography system 5,000
“Software” 2500
Total Investment (“Cost Basis”) $ 18.500
Annual Costs of “Operation & Maintenance” $ 10.500
Year Depreciation Factor
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76%
The residual value (“salvage value”) of each piece of equipment after 5 years is estimated to be 10% of original investment cost (ie, the “Cost Basis”). The marginal rate of employer contributions is 34%. The equipment will be depreciated using “MACRS” under the category of five years, with depreciation factors according to the table above included. Any capital gain taxed at 15%
Questions:
a) Determine the cash flow “contributions after” for this investment.
b) Given a minimum acceptable performance (BROWN) of 5% and using the indicator
Present Value (PW) will justify the investment?
b) BONUS: Compute the internal rate of return (“IRR”) of this cash flow.
Answers
Show clearly how he approached the problem, and provide clear and orderly calculations. Use the following format to summarize his answer:
Year
0
1
2
3
4
5
“Income Statement”
Savings
Expense
Operations &…