PhotoShopis considering replacing one of its Existing printers
with either of two new printers – Printer A or Printer B. Printer A
is a highly automated, coloured laser printer; Printer B is a less
expensive one that uses standard technology. To analyse these alternatives, you, as a financial analyst, prepared estimates of the initial investment and incremental (relevant) net cash inflows associated with each printer.
Printer A Printer B
Initial Investment $327,400 $191,940
Year (1-5) Net Inflow $100,000 $60,000
You believe that the two printers are equally risky and that acceptance of either of them will not change the firm’s overall risk. Your therefore decide to apply the firm’s 14% cost of capital when evaluating the printer. PhotoShoprequires all projects to have payback periods of less than four years.