Capital Budgeting for Equipment Replacement Free work cells Answer cells Madrid Chips is a manufacturer of prototype chips based in Madrid, Spain. Madrid's Chief Marketing Officer has provided the following forecast: 2018 Volume Forecast (Units): 615 2018 Average Selling Price: $95,000 Annual Volume Growth (%): 10% Annual Selling Price Increase (%) 5% To address future demand, Madrid is considering replacing its production equipment. The old equipment is fully depreciated and can be sold for a salvage if the plant is replaced. Any required working capital investment is to be recouped at the end of the project's life. Initial investment in 2018 Disposal of old equipment (pre-tax) Working capital investment invested on day 1 and recocovered at final disposal) Terminal disposal value in 2024 (pre-tax) Useful life (Years) Total annual cash operating costs per prototype chip Annaul cash operating cost increase (%) Required Rate of Return Applicable Tax Rate Replace $66,300,000 $4,200,000 $11,000,000 $ 16,000,000 7 $66,000 2% 14% 35% Madrid Chips uses straight-line depreciation assuming zero terminal disposal value. Madrid is subjected to a 35% income tax rate on operating income and gains/losses (eg on disposal of assets). Assume the initial investment s made at the beginning of 2018 and all transactions thereafter occur on the last day of the year. Answer cells must remain in the same location so do not insert/delete columns or rows in the file. Numeric answers must include a formula or reference so do not hard enter the answer. 1. Calculate operating income and net income (gains and losses on disposal, interest, and taxes are considered non-operating items). 2. Calculate net cash flows Calculated discounted each flore 3. Calculated discounted cash flows 4. Calculate the Net Present Value, Internal Rate of Return, and Payback Period Annual Change Day 1 2018 2019 2020 2021 2022 2023 2024 REPLACE INCOME STATEMENT Revenue -Operating costs =Operating Income +Non-Operating Gains (Losses) =Pre-tax Income - Taxes =Net Income CASH FLOWS Net Cash Flows Discount Factor Discounted Cash Flows Net Present Value Internal Rate of Return Cumulative Net Cash Flows Payback Period Capital Budgeting for Equipment Replacement Free work cells Answer cells Madrid Chips is a manufacturer of prototype chips based in Madrid, Spain. Madrid's Chief Marketing Officer has provided the following forecast: 2018 Volume Forecast (Units): 615 2018 Average Selling Price: $95,000 Annual Volume Growth (%): 10% Annual Selling Price Increase (%) 5% To address future demand, Madrid is considering replacing its production equipment. The old equipment is fully depreciated and can be sold for a salvage if the plant is replaced. Any required working capital investment is to be recouped at the end of the project's life. Initial investment in 2018 Disposal of old equipment (pre-tax) Working capital investment invested on day 1 and recocovered at final disposal) Terminal disposal value in 2024 (pre-tax) Useful life (Years) Total annual cash operating costs per prototype chip Annaul cash operating cost increase (%) Required Rate of Return Applicable Tax Rate Replace $66,300,000 $4,200,000 $11,000,000 $ 16,000,000 7 $66,000 2% 14% 35% Madrid Chips uses straight-line depreciation assuming zero terminal disposal value. Madrid is subjected to a 35% income tax rate on operating income and gains/losses (eg on disposal of assets). Assume the initial investment s made at the beginning of 2018 and all transactions thereafter occur on the last day of the year. Answer cells must remain in the same location so do not insert/delete columns or rows in the file. Numeric answers must include a formula or reference so do not hard enter the answer. 1. Calculate operating income and net income (gains and losses on disposal, interest, and taxes are considered non-operating items). 2. Calculate net cash flows Calculated discounted each flore 3. Calculated discounted cash flows 4. Calculate the Net Present Value, Internal Rate of Return, and Payback Period Annual Change Day 1 2018 2019 2020 2021 2022 2023 2024 REPLACE INCOME STATEMENT Revenue -Operating costs =Operating Income +Non-Operating Gains (Losses) =Pre-tax Income - Taxes =Net Income CASH FLOWS Net Cash Flows Discount Factor Discounted Cash Flows Net Present Value Internal Rate of Return Cumulative Net Cash Flows Payback Period
