QUESTION ONE

Printers Inc., is considering investing in a new plant to manufacturer a new generation of printers developed by 5he firm's research and development (R&D) department.

1. Projects useful life: The company expects the plant to operate for five years

2. Capital expenditure: $6million, which includes the construction costs and the costs of machinery and installation. The plant will be built on a parking lot owned by the company

3. Depreciation: For tax purposes ,the building and equipment will be depreciated over ten years using straight -line method

4. Revenue: The Company expects to sell 5,000 printers in year one, 10,000 in year two, and 20,000 thereafter. The printers will be sold at $800 each

5. R&D costs: $1million spent a year ago and this year

6. Overhead costs: 3.75 percent of the project revenues ,as stipulated by the corporate manual

7. Operating costs: Direct and indirect costs are expected to be $500 per unit produced

8. Inventories :The initial investment in raw, working in progress, and finished goods inventories is estimated at $1,500,000

9. Financing cost:10 percent of capital expenditures per year ,as stipulated by the corporate manual

10. Tax rate : 40 percent (includes federal and state taxes)

11. Discount rate: 8 percent .This is printers Inc.'s current borrowing rate.

Required

1. Compute and analyze items (a) through (h) using a Microsoft Excel spreadsheet.

a) 5-year projected income statement

b) 5-year projected cash flow

Calculate

c) The Payback period

d) Discounted Payback

e) The Profitability Index

f) The Net Present Value

g) The Internal Rate of Return