Evaluation Of Replacement Printers

Initial Investment

This report has been prepared on a case study which explains about a company CQU printers. This company is managing its operations through an old printer but the new managing director of the company has suggested to the company to make few changes into its current machinery and replace the machineries with new printer. Further, in this report, the cash flows of new printers have been evaluated and it has been found that which proposal is the best option for the company (Brown, Beekes & Verhoeven, 2011). Capital budgeting techniques makes it easy for the companies to evaluate 1 or more investment proposal easily. Following is the exact case:

Production units	$         50,000
Old Printer
Installed cost Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	$      4,00,000
Life	5	Years
Sales value after 3 years	$      4,20,000
Sales value after 5 years	$      1,50,000
Current book value	$      1,16,000
New Printer (A)
Installed cost	$      8,70,000
Life	5	Years
Sales value after 5 years	$      4,00,000
Book value after 5 years	$         43,500
New Printer (B)
Installed cost	$      6,60,000
Life	5	Years
Sales value after 5 years	$      3,30,000
Book value after 5 years	$         33,000
Tax rate	30%
Cost of capital	14%
Profit before depreciation and taxes for CQU printers
Year	Old printer	Printer A	Printer B
1	120000	250000	210000
2	120000	270000	210000
3	120000	300000	210000
4	120000	330000	210000
5	120000	370000	210000

In this part, the initial investment, operating cash inflows and terminal cash flows of both the projects have been calculated:

The below table explain that the initial investment of printer A is $ 4,50,000 and initial investment of project B is $ 2,40,000 which explain that the investment of printer B is quite lesser.

Calculation of initial investment
	New Mach (A)	New Mach (B)
Installed cost	$    8,70,000	$ 6,60,000
Less: Selling Price	$    4,20,000	$ 4,20,000
Initial Investment	$    4,50,000	$ 2,40,000

(Atrill & McLaney, 2006)

W.N:

Calculation of current net profit
Installed cost	$      4,00,000
Less: Depreciation of 3 years	$      1,50,000
Value after 3 years	$      2,50,000
Current Selling value	$      4,20,000
Profit	$      1,70,000
Net profit	$      1,70,00

More, operating cash flows of both the projects explain that the total operating cash inflow of Printer A is $ 7,26,5550 and on the other hand, total operating cash flow of printer B is $ 4,28,100 (Gitman, 2009).  Following is the calculation of operating cash flows:

Differential Cash Flows from Operations	Initial	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
DIFFERENTIATED DEPRECIATION		-1,15,300	-1,15,300	-1,15,300	-1,15,300	-1,15,300
Cash inflows from new machinery		2,50,000	2,70,000	3,00,000	3,30,000	3,70,000
Cash inflows from old machinery		-1,20,000	-1,20,000	-1,20,000	-1,20,000	-1,20,000
DIFFERENTIATED Earnings Before Interest &Taxes		14,700	34,700	64,700	94,700	1,34,700
TAXES		-4,410	-10,410	-19,410	-28,410	-40,410
DIFFERENTIATED EBIAT		10,290	24,290	45,290	66,290	94,290
DIFF Operational CF		1,25,590	1,39,590	1,60,590	1,81,590	2,09,590
Changes in operating assets and liabilities
Changes in cash	-25400
Changes in Accounts Receivable	-120000
Inventories	20000
Changes in Accounts Payable	35000
	-90,400	1,25,590	1,39,590	1,60,590	1,81,590	2,09,590
Total Operational Cash flows	7,26,550
Differential Cash Flows from Operations	Initial	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
DIFFERENTIATED DEPRECIATION		-75,400	-75,400	-75,400	-75,400	-75,400
Cash inflows from new machinery		2,10,000	2,10,000	2,10,000	2,10,000	2,10,000
Cash inflows from old machinery	-1,20,000	-1,20,000	-1,20,000	-1,20,000	-1,20,000	-1,20,000
DIFFERENTIATED Earnings Before Interest &Taxes		14,600	14,600	14,600	14,600	14,600
TAXES		-4,380	-4,380	-4,380	-4,380	-4,380
DIFFERENTIATED EBIAT		10,220	10,220	10,220	10,220	10,220
DIFF Operational CF		85,620	85,620	85,620	85,620	85,620
Total Operational Cash flows	4,28,100

(Falope & Ajilore, 2009)

W.N.

Years 1 to 5
Differential Depreciation
DEPRECIAT NEW MACHIN	-1,65,300	-1,25,400
DEPRECIAT OLD MACHIN	50,000	50,000
Differential Depreciation	-1,15,300	-75,400

More, terminal cash flows of both the projects explain that the total terminal cash inflow of Printer A is $ 3,56,500 after the end of 5 years and on the other hand, total terminal cash flow of printer B is $ 2,97,000.  Following is the calculation of terminal cash flows:

Calculation of terminal cash flows
	Printer A	Printer B
Salvage Value	$          43,500	$          33,000
Book Value	$       4,00,000	$       3,30,000
Capital Gain	$       3,56,500	$       2,97,000
Net cash flow	$       3,56,500	$       2,97,000

Accoridng to the part A, following is the cash flow stream of both the printers of the company: 

Cash Flows Stream	Initial	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
Initial Investment	-4,50,000
DIFFERENTIATED DEPRECIATION		-115300	-115300	-115300	-115300	-115300
Cash inflows from new machinery		250000	270000	300000	330000	370000
Cash inflows from old machinery		-120000	-120000	-120000	-120000	-120000
DIFFERENTIATED Earnings Before Interest &Taxes		14700	34700	64700	94700	134700
TAXES		-4410	-10410	-19410	-28410	-40410
DIFFERENTIATED EBIAT		10290	24290	45290	66290	94290
DIFF Operational CF	-4,50,000	125590	139590	160590	181590	209590
Changes in operating assets and liabilities
Changes in cash	-25400
Changes in Accounts Receivable	-120000
Inventories	20000
Changes in Accounts Payable	35000
	-5,40,400	125590	139590	160590	181590	209590
Salvage Value						43500
Book Value						400000
Capital Gain						356500
Tax on capital gain
Net cash flow						356500
Total Operational Cash flows	-540400	125590	139590	160590	181590	566090	6,33,050
Present value factor	1	0.8772	0.7695	0.6750	0.5921	0.5194
Present value	-540400	110167	107410	108394	107516	294009	1,87,096

Cash Flows Stream	Initial	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
Initial Investment	-2,40,000
DIFFERENTIATED DEPRECIATION		-75400	-75400	-75400	-75400	-75400
Cash inflows from new machinery		210000	210000	210000	210000	210000
Cash inflows from old machinery	-120000	-120000	-120000	-120000	-120000	-120000
DIFFERENTIATED Earnings Before Interest &Taxes		14600	14600	14600	14600	14600
TAXES		-4380	-4380	-4380	-4380	-4380
DIFFERENTIATED EBIAT		10220	10220	10220	10220	10220
DIFF Operational CF	-2,40,000	85620	85620	85620	85620	85620
Salvage Value						33000
Book Value						330000
Capital Gain						297000
Tax on capital gain
Net cash flow						297000
Total Operational Cash flows	-2,40,000	85,620	85,620	85,620	85,620	3,82,620	4,85,100
Present value factor	1	0.8772	0.7695	0.6750	0.5921	0.5194
Present value	-240000	75105.3	65881.8	57791.1	50693.9	198720.8	2,08,193

(Arnold, 2008)

It explains that the cash flows stream of both the projects are $ 1,87,906 and $ 2,08,193 (Davies & Crawford, 2011).

Further, the capital budgeting techniques have been applied over both the projects to evaluate the best project:

Payback period:

Payback period calculations are as follows:

Calculation of Payback period (Printer A)
Year	Cash Outflow	Cash Inflow	C.F
0	-540400		-540400
1		125590	-414810
2		139590	-275220
3		160590	-114630
4		181590	66960
5		209590	276550
Payback Period	2.37

Calculation of Payback period (Printer B)
Year	Cash Outflow	Cash Inflow	C.F
0	-240000		-240000
1		85620	-154380
2		85620	-68760
3		85620	16860
4		85620	102480
5		85620	188100
Payback Period	1.20

(Ching, Novazzi & Gerab, 2011)

Net present value:

Net present value of the projects is as follows:

Net present value (Printer A)
Year	Cash Outflow	Cash Inflow	P.V. Factor	P.V.
0	-540400		1	-540400
1		125590	0.877	110167
2		139590	0.769	107410
3		160590	0.675	108394
4		181590	0.592	107516
5		566090	0.519	294009
Net present value	187096

Net present value (Printer B)
Year	Cash Outflow	Cash Inflow	P.V. Factor	P.V.
0	-2,40,000		1	-240000
1		85,620	0.877	75105
2		85,620	0.769	65882
3		85,620	0.675	57791
4		85,620	0.592	50694
5		3,82,620	0.519	198721
Net present value	208193

(David, 2011)

Internal rate of return:

Internal rate of return of both the projects are as follows:

IRR
Year	Cash Outflow	Cash Inflow
0	-540400
1		125590
2		139590
3		160590
4		181590
5		566090
IRR	24.40%

IRR
Year	Cash Outflow	Cash Inflow
0	-240000
1		85620
2		85620
3		85620
4		85620
5		382620
IRR	37.93%

(Jiashu, 2009)

The above calculation of IRR, NPV and payback period explain that the Printer B is  better than printer A because the IRR, NPV of printer B is higher than printer B and payback period do printer A is quite higher.

Operating Cash Inflows

Through the above calculation of NPV an IRR and the above draw graph, it has been found that the net present value of printer A is $ 1,87,096 and the NPV of printer B is $ 2,08,193 which explains that the project b would offer more return to the company in comparison of printer A (Bierman and Smidt, 2012). On the other hand, the IRR of both the projects have been evaluated and it has been found that the printer a would offer 24.40% return to the company that means the company would be able to earn 24.40% profit and on the other hand, printer B would offer 37.93% return to the company. It expresses that printer B would offer more return to the company and this internal rate of return is quite higher than the total cost of capital of the company which is 14%. It explains that the printer B is on top of the list and Printer A is on 2^nd number in the list.

Further, if the unlimited funds aspect and Capital rationing aspects are taken into the concern than the decision could be changed about the best printer which would offer more return to the company (Horngren et al, 2005). In case of unlimited funds, company could raise the money for all the profitable projects basically through paying cost of capital to the fund holder. In the given case, unlimited fund aspect depict that both the projects are profitable for the company and both would offer a great return to the company so the company should adopted both the projects and enhance its revenues (Gitman & Zutter, 2012).

Further capital rationing explains that the company is not willing to enhance the fund and pay the required rate of return and thus the company should only invest in those projects which would offer high return to the company (Du & Girma, 2009). Thus, the case explains that the printer B must be adopted by the company and the investment must be done in this printer as it would offer high return to the company and the initial investment of this printer is also lower than the printer A (Deegan, 2013). It explains that the printer must be accepted by the company.

If the operating cash flows of printer A are very risky and the operating cash flows of printer b are less risky than it is recommended to the company to choose printer b only (Romney, Steinbart, Zhang & Xu, 2006). As the capital budgeting methods and capita; rationing model explain that the project B would offer high return to the company and the case explain that the associated risk with project B is lesser and thus the project b would be the best opportunity for the company to made (Kaplan & Atkinson, 2015). The above calculation of IRR, NPV and payback period explain that the Printer B is  better than printer A because the IRR, NPV of printer B is higher than printer B and payback period do printer A is quite higher (Shapiro, 2005).

Conclusion:

To conclude, both the projects would offer high return to the company and the invested amount would be got back by the company soon. But the Printer b is much better than Printer A in context with the NPV, IRR and Payback and thus it is concluded that the project b would be the best opportunity for the company to made.

References:

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Arnold, G. (2008). Corporate Financial Management. 3rd Ed. England: Pearson Education

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Ching HY, Novazzi A,& Gerab F. ( 2011).Relationship between Working Capital Management and Profitability in Brazilian Listed Companies. Journal of Global Business and Economics, 3 (1) Evidence from panel data analysis of selected quoted companies in Nigeria. Research

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Davies, T. & Crawford, I., (2011). Business accounting and finance. Pearson.

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Gitman, L.J. & Zutter, C.J., (2012). Principles of managerial finance. Prentice Hall.

Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. & Schatzberg, J., (2005). Introduction to management accounting. Upper Saddle River, New Jersey: Prentice Hall.

Jiashu, G., (2009). Study on Fair Value Accounting——on the essential characteristics of financial accounting [J]. Accounting Research, 5, p.003.

Kaplan, R.S. & Atkinson, A.A., (2015). Advanced management accounting. PHI Learning.

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Romney, M.B., Steinbart, P.J., Zhang, R. & Xu, G., (2006). Accounting information systems. Pearson Education.

Shapiro, A.C., (2005). Capital budgeting and investment analysis. Prentice Hall.

Initial investment: