Supreme Chips is a manufacturer of prototype chips based inâ Dublin, Ireland. Nextâ year, in 2018â,Supreme Chips expects to deliver 575 prototype chips at an average price of $90,000. Supreme Chips' marketing vice president forecasts growth of 55 prototype chips per year through 2024.
Thatâ is, demand will be 575 in 2018â,630 in 2019â,685 in 2020â, and so on.
The plant cannot produce more than 545 prototype chips annually. To meet future âdemand,Supreme Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $4,700,000. if the plant is replaced. If the plant isâ modernized, the costs to modernize 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 areâ available:
Modernize
Replace
Initial investment in 2018
$34,800,000
$66,100,000
Terminal disposal value in 2024
$6,600,000
$16,800,000
Useful life
7 years
7 years
Total annual cash operating cost per prototype chip
$74,500
$65,000
Supreme Chips usesâ straight-line depreciation, assuming zero terminal disposal value. Forâ simplicity, we assume no change in prices or costs in future years. The investment will be made at the beginning of 2018â, and all transactions thereafter occur on the last day of the year.Supreme âChips' required rate of return is 6â%.There is no difference between the modernize and replace alternatives in terms of required working capital. Supreme Chips has a special waiver on income taxes until 2024.
Requirement 1. Sketch the cash inflows and outflows of the modernize and replace alternatives over the 2018â-2024 period.
âFirst, determine the cash inflows and outflows of the modernize alternative over the 2018 to 2024 period. â(Use a minus sign or parentheses for a cash outflows. Leave unused cellsâ blank.)
Units
Net cash
Initial
Proceeds from
Year
sold
contributions
investments
sale of equipment
Jan 1, 2018
$(34,800,000)
Dec 31, 2018
575
$8,912,500
Dec 31, 2019
630
9,765,000
Dec 31, 2020
685
10,617,500
Dec 31, 2021
740
11,470,000
Dec 31, 2022
795
12,322,500
Dec 31, 2023
850
13,175,000
Dec 31, 2024
905
14,027,500
$6,600,000
âNext, determine the cash inflows and outflows of the replace alternative over the 2018 to 2024 period. â(Use a minus sign or parentheses for a cash outflows. Leave unused cellsâ blank.)
Units
Net cash
Initial
Proceeds from
Year
sold
contributions
investments
sale of equipment
Jan 1, 2018
$(66,100,000)
$4,700,000
Dec 31, 2018
575
$14,375,000
Dec 31, 2019
630
15,750,000
Dec 31, 2020
685
17,125,000
Dec 31, 2021
740
18,500,000
Dec 31, 2022
795
19,875,000
Dec 31, 2023
850
21,250,000
Dec 31, 2024
905
22,625,000
$16,800,000
Requirement 2. Calculate payback period for the modernize and replace alternatives. â(Round your answers to two decimalâ places.)
The payback period for the investment assuming the modernize alternative is ____ years.
3.
Calculate net present value of the modernize and replace alternatives
Supreme Chips is a manufacturer of prototype chips based inâ Dublin, Ireland. Nextâ year, in 2018â,Supreme Chips expects to deliver 575 prototype chips at an average price of $90,000. Supreme Chips' marketing vice president forecasts growth of 55 prototype chips per year through 2024.
Thatâ is, demand will be 575 in 2018â,630 in 2019â,685 in 2020â, and so on.
The plant cannot produce more than 545 prototype chips annually. To meet future âdemand,Supreme Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $4,700,000. if the plant is replaced. If the plant isâ modernized, the costs to modernize 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 areâ available:
Modernize | Replace | ||
Initial investment in 2018 | $34,800,000 | $66,100,000 | |
Terminal disposal value in 2024 | $6,600,000 | $16,800,000 | |
Useful life | 7 years | 7 years | |
Total annual cash operating cost per prototype chip | $74,500 | $65,000 |
Supreme Chips usesâ straight-line depreciation, assuming zero terminal disposal value. Forâ simplicity, we assume no change in prices or costs in future years. The investment will be made at the beginning of 2018â, and all transactions thereafter occur on the last day of the year.Supreme âChips' required rate of return is 6â%.There is no difference between the modernize and replace alternatives in terms of required working capital. Supreme Chips has a special waiver on income taxes until 2024.
Requirement 1. Sketch the cash inflows and outflows of the modernize and replace alternatives over the 2018â-2024 period.
âFirst, determine the cash inflows and outflows of the modernize alternative over the 2018 to 2024 period. â(Use a minus sign or parentheses for a cash outflows. Leave unused cellsâ blank.)
Units | Net cash | Initial | Proceeds from | |
Year | sold | contributions | investments | sale of equipment |
Jan 1, 2018 | $(34,800,000) | |||
Dec 31, 2018 | 575 | $8,912,500 | ||
Dec 31, 2019 | 630 | 9,765,000 | ||
Dec 31, 2020 | 685 | 10,617,500 | ||
Dec 31, 2021 | 740 | 11,470,000 | ||
Dec 31, 2022 | 795 | 12,322,500 | ||
Dec 31, 2023 | 850 | 13,175,000 | ||
Dec 31, 2024 | 905 | 14,027,500 | $6,600,000 |
âNext, determine the cash inflows and outflows of the replace alternative over the 2018 to 2024 period. â(Use a minus sign or parentheses for a cash outflows. Leave unused cellsâ blank.)
Units | Net cash | Initial | Proceeds from | |
Year | sold | contributions | investments | sale of equipment |
Jan 1, 2018 | $(66,100,000) | $4,700,000 | ||
Dec 31, 2018 | 575 | $14,375,000 | ||
Dec 31, 2019 | 630 | 15,750,000 | ||
Dec 31, 2020 | 685 | 17,125,000 | ||
Dec 31, 2021 | 740 | 18,500,000 | ||
Dec 31, 2022 | 795 | 19,875,000 | ||
Dec 31, 2023 | 850 | 21,250,000 | ||
Dec 31, 2024 | 905 | 22,625,000 | $16,800,000 |
Requirement 2. Calculate payback period for the modernize and replace alternatives. â(Round your answers to two decimalâ places.)
The payback period for the investment assuming the modernize alternative is ____ years.
3. | Calculate net present value of the modernize and replace alternatives |