22-35
22-35
22-34 Equipment replacement, no income taxes. Dublin Chips is a manufacturer of prototype chips based in Dublin, Ireland. Next yeas, in 2021 , Dublin Chips expects to delver 615 prototype Chips at an average price of 595,000 . Dublin Chips' marketing vice prosident forecasts growth of 65 prototype chips per year throuch 2027 . That is, demand wils be 615 in 2021,660 in 2602 , 745 in 2023 , and so on. The plant cancot produce more than 585 prototype chips amualy. To meet future demand, Dublin Crips must eather modernite the plant or roplace it. The eld equipment is fuly depreciated and equipinert in retained as part of the "modernite". alternative. The following data on the two options are aralable: begineing of 20e', and all transactions thereafter occur on the iast day of the yow, Dublin Chipo' requiced rate of rotum is 14%. 2. Cabcuate the payback period tor the 'mooknce'" and 'replace" aleenutiver. 3. Calculate the net present value of the "modernise" and "replace" ahemitives. 4. What factors enould Dubin Chipt conaider in choosing between the sttenativer? Recuired 2. Calculate isie net present value of the "moservae" and "raplace" aternatives. to Pibin Cine Required 22-34 Equipment replacement, no income taxes. Dublin Chips is a manufacturer of prototype chips based in Dublin, Ireland. Next year, in 2021, Dublin Chips expects to delliver 615 prototype chips at an average price of $95,000, Dublin Chips' marketing vice president forecasts growth of 65 prototype chips per year through 2027. That is, demand will be 615 in 2021, 680 in 2022, 745 in 2023, and so on. The plant cannot produce more than 585 prototype chips annually. To meet future demand, Dublin Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $4,200,000 if the plant is replaced. If the plant is modernized, the costs to modernize it are to be capitalized and deprociated over the useful life of the modernized plant. The old equipment is retained as part of the "modernize" alternative. The following data on the two options are available: Dublin Chips uses straight-line depreciation, assuminzzero 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. Dublin Chips' required rate of return is 14%. There is no difference between the "modernize" and "replace" alternatives in terms of required working capital. Dublin Chips has a special waiver on income taxes until 2027. 1. Sketch the cash inflows and outflows of the "modernize" and "replace" alternatives over the 2021-2027 period. 2. Calculate the payback period for the "modernize" and "replace" alternatives. 3. Calculate the net present value of the "modernize" and "replace" alternatives. 4. What factors should Dublin Chips consider in choosing between the alternatives? Required 22-35 Equipment replacement, income taxes (continuation of 22-34 ). Assume the same facts as in Problem 22 34[, except that the plant is located in Buffalo, New York. Dublin Chips has no special waiver on income taxes. It pays a 35% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 35% rate. 1. Sketch the after-tax cash inflows and outflows of the "modernize" and "replace" alternatives over the 2021-2027 period. 2. Calculate the net present value of the "modernize" and "replace" alternatives. 3. Suppose Dublin Chips is planning to build several more plants. It wants to have the most advantageous tax position possible. Dublin Chips has been approached by Spain, Malaysia, and Australia to construct plants in their countries. Use the data in Problem 22-34 and this problem to briefly describe in qualitative terms the income tax features that would be advantageous to Dublin Chips
