Expertexpert Chips Is A Manufacturer Of Prototype Chips Based In Austin Texas Next Y 2783246

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Chips is a manufacturer of prototype chips based in? Austin,Texas. Next? year, in

20152015?,

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Chips expects to deliver

555555

prototype chips at an average price of

$ 85 comma 000$85,000.

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?Chips’ marketing vice president forecasts growth of

5555

prototype chips per year through

20212021.

That? is, demand will be

555555

in

20152015?,

610610

in

20162016?,

665665

in

20172017?,

and so on.

The plant cannot produce more than

535535

prototype chips annually. To meet future? demand,

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Chips must either modernize the plant or replace it. The oldequipment is fully depreciated and can be sold for

$ 3 comma 700 comma 000$3,700,000

if the plant is replaced. If the plant is? modernized, the coststo modernize it are to be capitalized and depreciated over theuseful life of the updated plant. The old equipment is retained aspart of the modernize alternative. The following data on the twooptions are? available:   

Requirements 1 and 2. Sketch the? after-taxcash inflows and outflows of the modernize and replace alternativesover the

20152015

?-

20212021

period and calculate the net present value for eachalternative.

?Let’s begin with the modernize alternative. Start by computingthe present value of the? after-tax cash flows from? operations,then calculate the present value of the? after-tax cash savingsfrom depreciation and the terminal disposal? value, and? finally,determine the total net present value? (NPV) of the investment forthe modernize alternative. ?(Round interim calculations and yourfinal answers to the nearest whole dollar. Use a minus sign orparentheses for a negative net present? value.)

Net Cash

Total Present

PV factor

Inflow

Value

Present value of net cash flows:

After-tax cash flows from operations:

Dec 31, 2015

x

=

Dec 31, 2016

x

=

Dec 31, 2017

x

=

Dec 31, 2018

x

=

Dec 31, 2019

x

=

Dec 31, 2020

x

=

Dec 31, 2021

x

=

Information on options:

Modernize

Replace

Initial investment in 2015

$34,500,000

$66,100,000

Terminal disposal value in 2021

$7,500,000

$14,500,000

Useful life

7 years

7 years

Total annual cash operating cost per prototype chip

$66,500

$57,000

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Chips uses? straight-line depreciation, assuming zero terminaldisposal value. For? simplicity, we assume no change in prices orcosts in future years. The investment will be made at the beginningof

20152015?,

and all transactions thereafter occur on the last day of theyear.

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?Chips’ required rate of return is

1414?%.

There is no difference between the modernize and replacealternatives in terms of required working capital.

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Chips pays a

2525?%

tax rate on all income. Proceeds from sales of equipment abovebook value are taxed at the same

2525?%

rate.

Summarize cashflow for each options:

Modernize Alternative – Before Tax Cash Inflows andOutflows

Units

Net Cash

Initial

Proceeds from

Year

Sold

Contributions

Investments

Sale of Equipment

Jan 1, 2015

$(34,500,000)

Dec 31, 2015

555

$10,267,500

Dec 31, 2016

610

11,285,000

Dec 31, 2017

665

12,302,500

Dec 31, 2018

720

13,320,000

Dec 31, 2019

775

14,337,500

Dec 31, 2020

830

15,355,000

Dec 31, 2021

885

16,372,500

$7,500,000

Replace Alternative – Before Tax Cash Inflows andOutflows

Units

Net Cash

Initial

Proceeds from

Year

Sold

Contributions

Investments

Sale of Equipment

Jan 1, 2015

$(66,100,000)

$3,700,000

Dec 31, 2015

555

$15,540,000

Dec 31, 2016

610

17,080,000

Dec 31, 2017

665

18,620,000

Dec 31, 2018

720

20,160,000

Dec 31, 2019

775

21,700,000

Dec 31, 2020

830

23,240,000

Dec 31, 2021

885

24,780,000

14,500,000

Requirements:

1.

Sketch the? after-tax cash inflows and outflows of the modernizeand replace alternatives over the

20152015

?-

20212021

period.

2.

Calculate the net present value of the modernize and replacealternatives.

3.

Suppose

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Chips is planning to build several more plants. It wants to havethe most advantageous tax position possible.

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Chips has been approached by? Spain, Malaysia, and Australia toconstruct plants in their countries. Briefly describe inqualitative terms the income tax features that would beadvantageous to

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Chips.

Prof. Angela

4.6/5

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