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.
b) Using the data developed in a, find the relevant cashflow stream associated with each of the two proposed replacement printers if each is terminated at the end of five years.
c) Using the data developed in b, explain in your own words each of the following decision techniques:
1. Payback period [Note for year 5, use the operating cash inflows – exclude terminal cash flow – when making this calculation]. Support your answers with suitable references.
2. Net present value (NPV). Support your answers with suitable references.
3. Internal rate of return (IRR). Support your answers with suitable references. Support your answers with suitable references.
d) Draw net present value against the IRR profiles for the two replacement printers on the same set of axes. Support your graph with suitable references.
e) Discuss any conflicting rankings of the two printers, if any, resulting from use of NPV and decision criteria. [Hint: In your discussion compare NPV and IRR]. Support your answers with suitable references.
e) Recommend which, if either, of the printers the firm should acquire if the firm has:
1. Unlimited funds
2. Capital rationing
Explain using supporting valid references why you are making this recommendation.
f) What is the impact on your recommendation of the fact that the operating cash inflows associated with printer A are characterised as very risky in contrast to the low risk operating cash inflows of printer B