Please explain how to get the net present value.
Clean 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.) 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 2018 - 2024 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.) Data Table The following data on the two options are available: Modernize Replace 66,300,000 Initial investment in 2018 $ 36,500,000 $ Terminal disposal value in 2024 $ 6,800,000 $ 15,800,000 Useful life 7 years 7 years Total annual cash operating cost per prototype chip $ 55,000 $ 47,000 Clean 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. Clean Chips' required rate of return is 16%. There is no difference between the modernize and replace alternatives in terms of required working capital. Clean Chips pays a 20% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 20% rate. More Info Next year, in 2018, Clean Chips expects to deliver 610 prototype chips at an average price of $70,000. Clean Chips' marketing vice president forecasts growth of 45 prototype chips per year through 2024. That is, demand will be 610 in 2018, 655 in 2019, 700 in 2020, and so on. The plant cannot produce more than 590 prototype chips annually. To meet future demand, Clean Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $4,400,000 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. Net Cash Present Value PV factor Inflow of Cash Flows Net initial investment $ (36,500,000) After-tax cash flows from operations: Dec 31, 2018 0.862 x $ Dec 31, 2019 0.743 x Dec 31, 2020 0.641 x Dec 31, 2021 0.552 7,320,000 7,860,000 8,400,000 8,940,000 9,480,000 10,020,000 10,560,000 6,309,840 5,839,980 5,384,400 4,934,880 4,512,480 4,108,200 3,738,240 Dec 31, 2022 0.476 Dec 31, 2023 0.410 Dec 31, 2024 0.354 x Present value of after-tax cash flow from 0.354 5,440,000 1,925,760 sale of equipment Present value of annuity of equal income tax cash savings from annual depreciation 4.039 1,042,857 4,212,099 $ 4,465,879 Net present value
