Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

2. Cost Chips is a manufacturer of elite speed microchips based in Omaha, Nebraska. Next year, in 2021, Cost Chips expects to deliver 700 elite

image text in transcribed
2. Cost Chips is a manufacturer of elite speed microchips based in Omaha, Nebraska. Next year, in 2021, Cost Chips expects to deliver 700 elite speed microchips at an average price of $50,000. The plant cannot produce these elite speed microchips annually in the plant's current condition. To meet lture demand, Cost Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $4,010,000 if the plant is replaced. Ifthe plant is 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 are available: Modernize Replace Initial Investment in 2021 5 36,800,000 5 61,700,000 Terminal Disposal Value in 2028 5 7,000,000 5 17,000,000 Useful Life 8 Years 8 Yea rs Total annual cash variable costs per microchip 5 35,500 5 26,000 Cost 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 2021, and all transactions thereafter occur on the last day of the year. Cost Chips' required rate of return is 11%. Cost Chips has a special waiver on income taxes until 2029. Required: 1. Calculate net present value of the modernize and replace alternatives. 2. Which alternative should Cost Chips choose? 3. What factors should Cost Chips consider in choosing between the alternatives

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Excel Applications For Accounting Principles

Authors: Gaylord SmithBruce Walz

4th Edition

1133388027, 9781133388029

More Books

Students also viewed these Accounting questions

Question

Explain all drawbacks of application procedure.

Answered: 1 week ago