Calculate the after-tax cash inflows and outflows of the "modernize" and "replace" alternatives over the-period and calculate the net present value for each alternative.
Let's begin with the "modernize" alternative. Start by computing the present value of the after-tax cash flows from operations, then calculate the present value of the after-tax cash savings from depreciation and the terminal disposal value, and finally, determine the total net present value (N
dern Chips is a manufacturer of prototype chips based in Buffalo, New York. (Click the icon to view the prototype chips information.) (Click the icon to view information on the options.) esent Value of $1 table Pres ad the requirements. i More Info - X i Data Table - X quirements 1 and 2. Calculate The following data on the two options are available: t's begin with the "modernize" Next year, in 2021, Modern Chips expects to deliver 562 prototype chips at an (D ally, determine the total net pre average price of $75,000. Modern Chips' marketing vice president forecasts Modernize Replace lue of net cash flows.) growth of 50 prototype chips per year through 2027. That is, demand will be 562 in 2021, 612 in 2022, 662 in 2023, and so on. Initial investment in 2021 $ 36,300,000 $ 66,300,000 $ 6,800,000 $ 15,800,000 The plant cannot produce more than 532 prototype chips annually. To meet future Terminal disposal value in 2027 demand, Modern Chips must either modernize the plant or replace it. The old Useful life 7 years 7 years equipment is fully depreciated and can be sold for $3,800,000 if the plant is et initial investment 58,000 $ 47,000 replaced. If the plant is modernized, the costs to modernize it are to be capitalized Total annual cash operating cost per prototype chip $ After-tax cash flows from opera and depreciated over the useful life of the modernized plant. The old equipment is retained as part of the "modernize" alternative. Modern Chips uses straight-line depreciation, assuming zero terminal disposal value. For simplicity, Dec 31, 2021 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. Modern Chips' required rate Dec 31, 2022 of return is 18%. There is no difference between the "modernize" and "replace" alternatives in terms of Print Done Dec 31, 2023 required working capital. Modern Chips pays a 45% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 45% rate. Dec 31, 2024 Dec 31, 2025 Print Done Dec 31, 2026 Dec 31, 2027i (Click the icon to view the prototype chips information.) (Click the icon to view information on the options.) Present Value of $1 table Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Read the requirements. Requirements 1 and 2. Calculate the after-tax cash inflows and outflows of the "modernize" and "replace" alternatives over the 2021 - 2027 period and calculate the net present value for each alternative. Let's begin with the "modernize" alternative. Start by computing the present value of the after-tax cash flows from operations, then calculate the present value of the after-tax cash savings from depreciation and the terminal disposal value, ar finally, determine the total net present value (NPV) of the investment for the "modernize" alternative. (Round intermediary calculations and your final answers to the nearest whole dollar. Use a minus sign or parentheses for a negative preser value of net cash flows.) Net Cash Present Value PV factor Inflow of Cash Flows i Requirements X Net initial investment After-tax cash flows from operations: Dec 31, 2021 1. Calculate the after-tax cash inflows and outflows of the "modernize" and "replace" Dec 31, 2022 alternatives over the 2021 - 2027 period. Dec 31, 2023 2. Calculate the net present value of the "modernize" and "replace" alternatives. Suppose Modern Chips is planning to build several more plants. It wants to have the most Dec 31, 2024 X advantageous tax position possible. Modern Chips has been approached by Spain, Dec 31, 2025 Malaysia, and Australia to construct plants in their countries. Briefly describe in qualitative terms the income tax features that would be advantageous to Modern Chips. Dec 31, 2026 Dec 31, 2027 Print Done
