Graded 22-1 Question 8 - Please fill in blanks.

8. Max Chips is a manufacturer of prototype chips based in Buffalo, New York. 40(Click the icon to view the prototype chips information.) 41 (Click the icon to view information on the options.) Present Value of $1 table42 Present Value of Annuity of $1 table43 Future Value of $1 table44 Future Value of Annuity of $1 table45 Read the requirements 46 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, and 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 present value of net cash flows.) Net Cash Present Value PV factor Inflow of Cash Flows Net initial investment After-tax cash flows from operations: Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 Dec 31, 2026 Dec 31, 2027 Present value of after-tax cash flow from sale of equipment Present value of annuity of equal income tax cash savings from annual depreciation = LIO TUTTO = = Net present value Next, compute the net present value for the "replace" 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 NPV of the investment under the replace alternative. (Round intermediary calculations and your final answers to the nearest whole dollar. Use a minus sign or parentheses for a negative present value of cash flows.) Net Cash Present Value PV factor Inflow of Cash Flows II Net initial investment After-tax cash flows from operations: Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 Dec 31, 2026 Dec 31, 2027 Present value of after-tax cash flow from sale of equipment Present value of annuity of equal income tax cash savings from annual depreciation 11 100 Net present value Requirement 3. Suppose Max Chips is planning to build several more plants. It wants to have the most advantageous tax position possible. Max 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 Max Chips. Select five income tax features that would be advantageous for the company. Max Chips would prefer to: (1) (2) 3. (3) 1. 2. 4. 5. (5) 40: More Info Next year, in 2021, Max Chips expects to deliver 540 prototype chips at an average price of $68,000. Max Chips marketing vice president forecasts growth of 75 prototype chips per year through 2027. That is, demand will be 540 in 2021, 615 in 2022, 690 in 2023, and so on. The plant cannot produce more than 520 prototype chips annually. To meet future demand, Max 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 depreciated over the useful life of the modernized plant. The old equipment is retained as part of the "modernize" alternative. 41: Data Table The following data on the two options are available: $ $ Modernize Replace Initial investment in 2021 33,700,000 $ 66,100,000 Terminal disposal value in 2027 6,200,000 $ 14,500,000 Useful life 7 years 7 years Total annual cash operating cost per prototype chip $ 50,500 $ 43,000 Max 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 2021, and all transactions thereafter occur on the last day of the year. Max Chips' required rate of return is 6%. There is no difference between the "modernize" and "replace" alternatives in terms of required working capital. Max Chips pays a 45% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 45% rate. 8. Max Chips is a manufacturer of prototype chips based in Buffalo, New York. 40(Click the icon to view the prototype chips information.) 41 (Click the icon to view information on the options.) Present Value of $1 table42 Present Value of Annuity of $1 table43 Future Value of $1 table44 Future Value of Annuity of $1 table45 Read the requirements 46 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, and 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 present value of net cash flows.) Net Cash Present Value PV factor Inflow of Cash Flows Net initial investment After-tax cash flows from operations: Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 Dec 31, 2026 Dec 31, 2027 Present value of after-tax cash flow from sale of equipment Present value of annuity of equal income tax cash savings from annual depreciation = LIO TUTTO = = Net present value Next, compute the net present value for the "replace" 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 NPV of the investment under the replace alternative. (Round intermediary calculations and your final answers to the nearest whole dollar. Use a minus sign or parentheses for a negative present value of cash flows.) Net Cash Present Value PV factor Inflow of Cash Flows II Net initial investment After-tax cash flows from operations: Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 Dec 31, 2026 Dec 31, 2027 Present value of after-tax cash flow from sale of equipment Present value of annuity of equal income tax cash savings from annual depreciation 11 100 Net present value Requirement 3. Suppose Max Chips is planning to build several more plants. It wants to have the most advantageous tax position possible. Max 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 Max Chips. Select five income tax features that would be advantageous for the company. Max Chips would prefer to: (1) (2) 3. (3) 1. 2. 4. 5. (5) 40: More Info Next year, in 2021, Max Chips expects to deliver 540 prototype chips at an average price of $68,000. Max Chips marketing vice president forecasts growth of 75 prototype chips per year through 2027. That is, demand will be 540 in 2021, 615 in 2022, 690 in 2023, and so on. The plant cannot produce more than 520 prototype chips annually. To meet future demand, Max 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 depreciated over the useful life of the modernized plant. The old equipment is retained as part of the "modernize" alternative. 41: Data Table The following data on the two options are available: $ $ Modernize Replace Initial investment in 2021 33,700,000 $ 66,100,000 Terminal disposal value in 2027 6,200,000 $ 14,500,000 Useful life 7 years 7 years Total annual cash operating cost per prototype chip $ 50,500 $ 43,000 Max 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 2021, and all transactions thereafter occur on the last day of the year. Max Chips' required rate of return is 6%. There is no difference between the "modernize" and "replace" alternatives in terms of required working capital. Max Chips pays a 45% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 45% rate