Chips is a manufacturer of prototype chips based in? Austin, Texas. Next? year, in2015?,

IrishChips expects to deliver535

prototype chips at an average price of$55,000.

IrishChips' marketing vice president forecasts growth of

45prototype chips per year through

2021.That? is, demand will be 535in2015?,580in

2016?,625in2017?,and so on.

The plant cannot produce more than510

prototype chips annually. To meet future? demand,Irish

Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for$3,700,000

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 2015	$35,300,000		$63,800,000
Terminal disposal value in 2021	$6,800,000		$16,500,000
Useful life	7 years		7 years
Total annual cash operating cost per prototype chip	$38,500		$28,000

IrishIrish

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

2015?,and all transactions thereafter occur on the last day of the year.

Irish

?Chips' required rate of return is

6?%.

There is no difference between the modernize and replace alternatives in terms of required working capital.

IIrishChips pays a

20?%tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same

20?%rate.

1.	Sketch the? after-tax cash inflows and outflows of the modernize and replace alternatives over the 20152015 ?- 20212021 period.
2.	Calculate the net present value of the modernize and replace alternatives.
3.	Suppose IrishIrish Chips is planning to build several more plants. It wants to have the most advantageous tax position possible. IrishIrish Chips has been approached by? Spain, Malaysia, and Australia to construct plants in their countries. Briefly describe in qualitative terms the income tax features that would be advantageous to IrishIrish Chips.