Data Table Modernize Replace 37,100,000 S7,200,000 years 57,500 Initial investme

Question

Data Table Modernize Replace 37,100,000 S7,200,000 years 57,500 Initial investment in 2018 S 63,800,000 S 17,000,000 years 48,000 Terminal disposal value in 2024 Useful life Total annual cash operating cost per prototype chip S A 1 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. A- 1 Chips' required rate of return is 18%. There is no difference between the modernize and replace alternatives in terms of required working capital. A-1 Chips has a special waiver on income taxes until 2024 Print Done

Explanation / Answer

60633008

1. Sketch the cash inflows and outflows of the modernize and replacement alternatives over the 2012 to 2018 period. Modernizing Alternative: 01-01-2018 31-12-2018 31-12-2019 31-12-2020 31-12-2021 31-12-2022 31-12-2023 31-12-2024 Initial Investment Equipt. ($371,00,000) Average Sales Price $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 Unit cash operating costs -57,500 -57,500 -57,500 -57,500 -57,500 -57,500 -57,500 Net cash inflows per unit $17,500 $17,500 $17,500 $17,500 $17,500 $17,500 $17,500 Units produced and sold 622 687 752 817 882 947 1,012 Net annual cash inflows $108,85,000 $120,22,500 $131,60,000 $142,97,500 $154,35,000 $165,72,500 $177,10,000 Terminal Disposal Value 72,00,000 Total Cash Flow ($371,00,000) $108,85,000 $120,22,500 $131,60,000 $142,97,500 $154,35,000 $165,72,500 $249,10,000 NPV of cash inflows $539,42,360 0.847 0.718 0.609 0.516 0.437 0.370 0.314 3. NPV of Modernize Alternative $168,42,360 9219595 8632155 8014440 7377510 6745095 6131825 7821740 53942360

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