A-1 Chips is a manufacturer of prototype chips based in?Buffalo, New York.

CoursHeroTranscribedText: Next year, in 2018, A -1 Chips expects to deliver 540 prototype chips at an average price of $68,000. A 1 Chips' marketing vice president forecasts growth of 80 prototype chips per year through 2024. That is, demand will be 540 in 2018, 620 in 2019, 700 in 2020, and so on. The plant cannot produce more than 530 prototype chips annually. To meet future demand, A 1 Chips must either modernize the plant or replace it. 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 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 2018 $ 34,400,000 $ 66,500,000 Terminal disposal value in 2024 $ 6,600,000 $ 17,200,000 Useful life 7 years 7 years Total annual cash operating cost per prototype chip $ 52,500 $ 44,000 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 8%. There is no difference between the modernize and replace alternatives in terms of required working capital. A -1 Chips pays a 45% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 45% rate