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CQU Printers is a medium-sized commercial printer of promotional advertising brochures, booklets and direct mail. The firm's major clients are...
CQU Printers is a medium-sized commercial printer of promotional advertising brochures, booklets and direct mail. The firm's major clients are Australian-based advertising agencies. Most jobs have production runs of over $50,000 units. It has not been able to compete with large printing companies, because of its existing older, inefficient printers. The firm is currently having problems cost effectively meeting run length requirements as well as meeting quality standards. The general manager has proposed the purchase of two large colour printers designed for high quality runs. The purchase of a new printer would enable CQU Printers to reduce its cost of labour and therefore the price to the client, putting the firm in a more competitive position. The key characteristic of the old presses is summarised below. Old Printer: Originally purchased three years ago at an installed cost of $400,000, depreciated using a 5-year straight line method. The old printer has a remaining economic life of five years. IT can be sold today for $420,000 before taxes. If it is retained it can be sold for $150,000 before taxes at the end of five years. Book value is currently $116,000 and at the end of year 5 it will be $0. New printer options for CQU Printers comprise either Printer A or Printer B. Printer A: This highly automated printer can be purchased for $830,000 and will require $40,000 in installation costs. It will be depreciated using a five-year straight-line method. At the end of five years the machine can be sold for $400,000 before taxes with a book value of $43,500. If this machine is acquired, it is anticipated that the following current account changes would result: Cash $ 25,400 Accounts Receivable $ 120,000 Inventories -$ 20,000 Accounts payable $ 35,000 Printer B: This printer is not as sophisticated as Printer A. It costs $640,000 and requires $20,000 in installation costs. It will be depreciated using a five-year straight-line method. At the end of five years it can be sold for $330,000 before tax with a book value of $33,000. Acquisition of this press will have no effect on the firm's net working capital investment. The firm is subject to a 30% tax rate on income and full capital gains on sale of equipment. The firm's cost of capital is 14 percent per annum. The firm estimates that its profits before depreciation and taxes with the old printer and with printers' A or B for each of the five years would be shown as follows: Profits before depreciation and taxes for CQU Printers Year Old printer Printer A Printer B 1 $ 120,000 $ 250,000 $ 210,000 2 $ 120,000 $ 270,000 $ 210,000 3 $ 120,000 $ 300,000 $ 210,000 4 $ 120,000 $ 330,000 $ 210,000 5 $ 120,000 $ 370,000 $ 210,000 FINC20018 T3 2017: Assessment 2 Page | 5 Required to be reported in your single report of 2,000 words: a) For each of the two proposed replacement printers, where there are no capital gains on the sale of the old printer tax, determine: 1. Initial investment 2. Operating cash inflows 3. Terminal cash flow [Note: This is at the end of year 5] Show timelines, formulas and workings where applicable. Reference any information your source from any textbooks, journals etc.
