P21-34 (similar to) Question Help A-1 Chips is a manufacturer of prototype chips
ID: 2578032 • Letter: P
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P21-34 (similar to) Question Help A-1 Chips is a manufacturer of prototype chips based in Dublin, Ireland. Next year, in 2018, A-1 Chips expects to deliver 622 prototype chips at an average price of $75,000. A-1 Chips' marketing vice president forecasts growth of 65 prototype chips per year through 2024. That is, demand will be 622 in 2018, 687 in 2019, 752 in 2020, and so on (Click the icon to view additional information.) (Click the icon to view the data on the two options available and additional information.) Click the icon to view the Future Value of $1 factors. (Click the icon to view the Future Value of Annuity of $1 factors.) (Click the icon to view the Present Value of $1 factors.) Click the icon to v ew the Present Value of Annuity of $1 factors. Read th e requirements Requirement 1. Sketch the cash inflows and outflows of the modernize and replace alternatives over the 2018- 2024 period. First, determine the cash inflows and outflows of the modemize alternative over the 2018 to 2024 period. (Use a minus sign or parentheses for a cash outflows. Leave unused cells blank.) Units Net cash Initial Proceeds from sold contributions sale of equipment More Info ear investments Jan 1, 2018 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 The plant cannot produce more than 607 prototype chips annually. To meet future demand, A 1 Chips must either modemize the plant or replaceit. The old equipment is fully depreciated and can be sold for $4,500,000 if the plant is replaced. If the plant is modernized, the costs to modemize it are to be capitalized and depreciated over the useful life of the updated plant. The old equipment is retained as part of the modernize alternative. The following data on the two options are available PrintDone Data Table Modernize Replace 37,100,000 S 7,200,000 7 years 57,500 Initial investment in 2018 $ 63,800,000 $ 17,000,000 years 48,000 Terminal disposal value in 2024 Useful life Total annual cash operating cost per prototype chip S A-1 Chips uses straight-line depreciation, assuming zero terminal disposal value. For simplicity, we assume no change in prices or costs in future years. The investment will be made at the beginning of 2018, and all transactions thereafter occur on the last day of the year. A 1 Chips' required rate of return is 18%. There is no difference between the modernize and replace alternatives in terms of required working capital. A-1 Chips has a special waiver on income taxes until 2024. PrintDoneExplanation / Answer
Calculation of PV for the modernisation scheme
Contribution = $75000 - $57500 = $17500
Calculation of PV for the replacement scheme:
Contribution per unit = $75000 - $48000 = $27000
As NPV is greater, replacement is recommended
Year Units sold Contribution Contributions Initial sale of old Net Cash PV Factor PV per unit Investment equipment Flow @ (a) (b) (c ) (e) (f) c-e+f 18% Jan 1 2018 37100000 -37100000 1 -37100000 Dec 31 2018 622 17500 10885000 10885000 0.847 9219595 Dec 31 2019 687 17500 12022500 12022500 0.718 8632155 Dec 31 2020 752 17500 13160000 13160000 0.609 8014440 Dec 31 2021 817 17500 14297500 14297500 0.516 7377510 Dec 31 2022 882 17500 15435000 15435000 0.437 6745095 Dec 31 2023 947 17500 16572500 16572500 0.370 6131825 Dec 31 2024 1012 17500 17710000 7200000 24910000 0.314 7821740 NPV $16842360Related Questions
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