Quick Computing currently sells 1000 computer chips per year at a gross profit o
ID: 2483332 • Letter: Q
Question
Quick Computing currently sells 1000 computer chips per year at a gross profit of $15 per chip. They have the opportunity to buy new equipment that will produce chips that will have a gross profit of $18 each. A marketing consultant who was paid $20,000 forecasts sales of the new improved chips to be 1200 chips per year. However, demand for the old chip will decrease and they estimate they will only be able to sell 700 of the old chips once the new chips are introduced. The overhead allocation is $1 per chip. The new equipment will cost $200,000 and will be depreciated to zero over a 4 year life. All other cash flows are the same with or without the new equipment. Quick Computing has a marginal tax rate of 30%. What Is the per year cash flow that should be used to. calculate the Net Present Value of the new equipment? If the appropriate Opportunity Cost of capital is 12s. should Quick computing adopt this project?Explanation / Answer
Answer
Answer (a) & (b)
Note : Marketing consultant paid $ 20,000 is sunk cost So will not be included for decision making purpose.
Overhead allocation will not be considered for decision making purpose but will be deducted from gross profit for tax benefit purpose and will be added back after tax.
Figures in $
Year
New chip gross profit after overhead
Old chip gross profit loss
Total additional profit before tax
Total additional profit After tax
Total additional profit After tax + overhead allocation addition
Depreciation tax benefit
Cost of equipment
Cash flow
Disc : Rate 12%
Present value
A
B
C
D
E
F
G
H
I
A+B
C*(1-tax rate)
D+ (1200*1)
E+F+G
H*I
1200*(18-1)
(300*15)
(200000/4)*0.3
0
-200000
-200000
1.00
-200000.00
1
20400
-4500
15900
11130
12330
15000
27330
0.89
24401.79
2
20400
-4500
15900
11130
12330
15000
27330
0.80
21787.31
3
20400
-4500
15900
11130
12330
15000
27330
0.71
19452.95
4
20400
-4500
15900
11130
12330
15000
27330
0.64
17368.71
Net present value
-116989.24
Answer : Quick Computing should not adopt this project as NPV of Project is Negative (-116989.24)
Figures in $
Year
New chip gross profit after overhead
Old chip gross profit loss
Total additional profit before tax
Total additional profit After tax
Total additional profit After tax + overhead allocation addition
Depreciation tax benefit
Cost of equipment
Cash flow
Disc : Rate 12%
Present value
A
B
C
D
E
F
G
H
I
A+B
C*(1-tax rate)
D+ (1200*1)
E+F+G
H*I
1200*(18-1)
(300*15)
(200000/4)*0.3
0
-200000
-200000
1.00
-200000.00
1
20400
-4500
15900
11130
12330
15000
27330
0.89
24401.79
2
20400
-4500
15900
11130
12330
15000
27330
0.80
21787.31
3
20400
-4500
15900
11130
12330
15000
27330
0.71
19452.95
4
20400
-4500
15900
11130
12330
15000
27330
0.64
17368.71
Net present value
-116989.24
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.