Lasting Impressions Company
Lasting Impressions Company
Lasting Impressions Company (LI) is a medium-sized commercial printer of promotional advertising brochures, booklets, and other direct-mail pieces. The firm’s major clients are New York- and Chicago- based ad agencies. The typical job is characterized by high quality and production runs of over 50,000 units. LI has not been able to complete effectively with larger printers because of its existing older, inefficient presses. 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 one of two large six-color presses designed for long, high-quality runs. The purchase of a new press would enable LI to reduce its cost of labor and therefore the price to the client, putting the firm in a more competitive position. The key financial characteristics of the old press and the two new presses are summarized in what follows.
Old press – Originally purchased 3 years ago at an installed cost of $400,000, it is being depreciated under MACRS using a 5-year recovery period. The old press has a remaining economic life of 5 years. It can be sold today to net $420,000 before taxes; if it is retained, it can be sold to net $150,000 before taxes at the end of 5 years.
Press A – This highly automated press can be purchased for $830,000 and will require $40,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, the machine can be sold to net $400,000 before taxes. If this machine is acquired, it is anticipated that the following current account changes would result. Cash + $25,000 Accounts Receivable + 120,000 Inventories - 20,000 Accounts Payable + 35,000
Press B – This press is not as sophisticated as press A. It costs $640,000 and requires $20,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, it can
Lasting Impressions Company (LI) is a medium-sized commercial printer of promotional advertising brochures, booklets, and other direct-mail pieces. The firm’s major clients are New York- and Chicago- based ad agencies. The typical job is characterized by high quality and production runs of over 50,000 units. LI has not been able to complete effectively with larger printers because of its existing older, inefficient presses. 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 one of two large six-color presses designed for long, high-quality runs. The purchase of a new press would enable LI to reduce its cost of labor and therefore the price to the client, putting the firm in a more competitive position. The key financial characteristics of the old press and the two new presses are summarized in what follows.
Old press – Originally purchased 3 years ago at an installed cost of $400,000, it is being depreciated under MACRS using a 5-year recovery period. The old press has a remaining economic life of 5 years. It can be sold today to net $420,000 before taxes; if it is retained, it can be sold to net $150,000 before taxes at the end of 5 years.
Press A – This highly automated press can be purchased for $830,000 and will require $40,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, the machine can be sold to net $400,000 before taxes. If this machine is acquired, it is anticipated that the following current account changes would result. Cash + $25,000 Accounts Receivable + 120,000 Inventories - 20,000 Accounts Payable + 35,000
Press B – This press is not as sophisticated as press A. It costs $640,000 and requires $20,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, it can