Acutina, Iann Joseph Loreto A.

March 14, 2019

BA 142, Professor Go

Point of View

Lasting Impressions Company is a medium-sized company in the print industry. They

have major clients/agencies that belong to the advertising in Chicago and New York.

As Lasting Impressions Company, we have to analyze our current situation in terms of

our decisions to make for our operations, financial investments, and evaluate the risks and impact

of our decisions to make. These decisions shall serve as solutions to our dilemma on our

decisions to make, while ensuring growth and promising returns to our company.

Statement of the Problem

Lasting Impressions Company has been facing problems in competing with larger

printers in their industry due to its older, and inefficient presses. This consequently give them

problems in meeting run-length requirements, as well as providing quality standards in a cost-

effective manner.

Statement of Objectives

1. To analyze which machine the company should purchase to replace its current

outdated machine on different budget plans.

2. To evaluate the impact risks they’ll have to deal with from every investing decisions.
 3. To put into practice the company’s understanding of risks and refinements in capital

budgeting.

Areas of Consideration

One most significant factor to consider in choosing the right alternative is their financial

capacity to acquire the machine that would yield a higher operational return to the company.

Alternative Courses of Actions and its Analysis

LASTING IMPRESSIONS COMPANY

A. For each of the two proposed replacement presses, determine:

(1) Initial investment.

PRESS A PRESS B
Installed cost of new press

Cost of new press $830,000.00 $640,000.00

Installation cost 40,000.00 20,000.00

Total Cost - New Press $870,000.00 $660,000.00

After-tax proceeds-sale of old

asset

Proceeds from sale of old press $(420,000.00)

Tax on sale of old press (121,600.00)

Total proceeds-sale of old press $(298,400.00) $(298,400.00) $(298,400.00)

Change in net working capital $90,400.00

Initial investment $662,000.00 $361,600.00

Tax on sale of old press

Sale Price $420,000.00

Book Value $ 400,000 - [(.20 +.32 +.19) x $400,000] (116,000.00)

Gain $304,000.00

Tax Rate (40%) 40%

Tax on sale of old press $121,600.00

Computation for Change in net working capital

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 net working capital $90,400.00

(2) Operating cash inflows (considered depreciation in year 6)

Existing Cost Rate Depreciation

1 $400,000.00 0.12 $48,000.00

2 $400,000.00 0.12 $48,000.00

3 $400,000.00 0.05 $20,000.00

$116,000.00

Press A Cost Rate Depreciation

1 $870,000.00 0.20 $174,000.00

2 $870,000.00 0.32 $278,400.00

3 $870,000.00 0.19 $165,300.00

 4 $870,000.00 0.12 $104,400.00

5 $870,000.00 0.12 $104,400.00

6 $870,000.00 0.05 $43,500.00

$870,000.00

Press B Cost Rate Depreciation

1 $660,000.00 0.20 $132,000.00

2 $660,000.00 0.32 $211,200.00

3 $660,000.00 0.19 $125,400.00

4 $660,000.00 0.12 $79,200.00

5 $660,000.00 0.12 $79,200.00

6 $660,000.00 0.05 $33,000.00

$660,000.00

(3) Terminal Cash Flow (At the end of year 5)

PRESS A PRESS B

After tax proceed from sale

of new press

Proceeds of sale of new press $400,000.00 $330,000.00

Tax on sale of new press (142,600.00) (118,800.00)

 Total Proceeds-new press $257,400.00 $211,200.00

After-tax proceeds-sale of

old press :

Proceeds on sale of old press $(150,000.00)

Tax on sale of old press (60,000.00)

Total proceeds-sale of old (90,000.00) (90,000.00) (90,000.00)

press $90,400.00 $0.00

Change in net working

capital

Terminal Cash flow $257,800.00 $121,200.00

Computation for Tax on sale of new press

PRESS A PRESS B

Sale price $400,000.00 $330,000.00

Book Value (Yr 6) $(43,500.00) $(33,000.00)

Gain $356,500.00 $297,000.00

Tax Rate (40%) 40% 40%

Tax on sale of new press $142,600.00 $118,800.00

Computation for Tax on sale of old press

 Sale price $150,000.00

Book Value (Yr 6) 0.00

Gain $150,000.00

Tax Rate (40%) 40%

Tax on sale of old press** $60,000.00

PRESS A PRESS B

Initial Investment $662,000.00 $361,600.00

Cash Inflow Cash Inflow

Year 1 $128,400.00 $87,600.00

Year 2 $182,160.00 $119,280.00

Year 3 $166,120.00 $96,160.00

Year 4 $167,760.00 $85,680.00

Year 5* $449,560.00 $206,880.00

* Operating cash flow $191,760.00 $85,680.00

+ Terminal cash inflow $257,800.00 $121,200.00

Cash inflows year 5* $449,560.00 $206,880.00

B. Using the data developed in Part A, find and depict on a time line the relevant cash flow

stream associated with each of the two proposed presses, assuming that each is terminated at the

end of 5 years.
 Operating Cash Inflows

$182,160.00 $167,760.00

$128,400.00 $166,120.00 $449,560.00

0 1 2 3 4 5

End of Year

Operating Cash Inflows

$119,280.00 $85,680.00

$87,600.00 $96,160.00 $206,880.00

0 1 2 3 4 5

End of Year
C. Using the data developed in Part B, apply each of the following decision techniques:

CUMMULATIVE CASH FLOWS

PRESS A PRESS B

Year 1 $128,400.00 $87,600.00

Year 2 $310,560.00 $206,880.0

Year 3 $476,680.00 $303,040.0

Year 4 $644,440.00 $388,720.0

Year 5 $1,094,000.00 $595,600.0

Payback period

Press A Press B

4 years + [(662,000 - 3 years + [(361,600 -

644,440)/191,760] 303,040)/85,680]

= 4 + (17,600/191,760) = 3 + (58,560/85,680)

= 4 + 0.9178 = 3 + .68347

= 4.09 years = 3.8 years

Conclusion and Recommendations

The firm should acquire Press A if they have unlimited funds, but if the firm is subject to

capital rationing, then the firm should choose to acquire Press B over Press A.

In lieu of the impact of the recommendation of the fact that the operating cash inflows, we

would like to take a look at the risk levels of the decisions. Taking the risk levels into account, I

would have to elect to recommend the lower risk option that Press B presents .I would prefer to

take lower risk (but more guaranteed) operating cash inflows that it would provide. The risk would

need to be measured by a quantitative technique such as certainty equivalents or risk-adjusted

discount rates. The resultant present value could then be compared to Press B and a decision made.