As capital investment analyst for the Parkhurst Printing Corporation, you have been asked to evaluate the advisability of purchasing a new printing press to accommodate projected increases in demand. This new machine is expected to last 5 years, and you will be calculating the cash flows of the project for that period.
The purchase price of the press is expected to be $140,000; in addition, it will cost $10,000 to install it. The press will be depreciated on a straight-line basis over 5 years to a zero salvage value. However, it is expected to have a market value of $10,000 at the end of 5 years.
The press is expected to generate the following cash revenues and cash costs and expenses:
Year 1 Year 2 Year 3 Year 4 Year 5
Cash revenue $50,000 $80,000 $80,000 $80,000 $40,000
Cash Cost & Expense 25,000 40,000 40,000 40,000 20,000
Because of increased production, additional working capital of $15,000 will be needed at t=0 (today) and will be returned at the end of the project (5 years from now). The income tax rate is 40 percent, and the company's cost of capital is 12 percent.
Calculate the net present value. Should the press be purchased?