Dublin Chips is a manufacturer of prototype chipsbased in Dublin, Ireland. Next year, in 2018, Dublin Chips expects to deliver 615 prototype chips at an averageprice of $95,000. Dublin Chips’ marketing vice president forecasts growth of 65 prototype chips per yearthrough 2024. That is, demand will be 615 in 2018, 680 in 2019, 745 in 2020, and so on.The plant cannot produce more than 585 prototype chips annually. To meet future demand, Dublin Chipsmust 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 updated plant. The old equipment is retained as part of the modernizealternative. The following data on the two options are available: Modernize ReplaceInitial investment in 2018 $35,300,000 $66,300,000 Terminal disposal value in 2024 $ 7,500,000 $16,000,000 Useful life 7 years 7 years Total annual cash operating costs per prototype chip $78,500 $66,000 Dublin Chips uses straight-line depreciation, assuming zero terminal disposal value. For simplicity, we assumeno 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. Dublin Chips’ required rate of return is 14%.There is no difference between the modernize and replace alternatives in terms of required workingcapital. Dublin Chips has a special waiver on income taxes until 2024.Q. What factors should Dublin Chips consider in choosing between the alternatives?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Dublin Chips is a manufacturer of prototype chips
based in Dublin, Ireland. Next year, in 2018, Dublin Chips expects to deliver 615 prototype chips at an average
price of $95,000. Dublin Chips’ marketing vice president
through 2024. That is, demand will be 615 in 2018, 680 in 2019, 745 in 2020, and so on.
The plant cannot produce more than 585 prototype chips annually. To meet future demand, Dublin Chips
must either modernize the plant or replace it. The old equipment is fully
$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 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 2018 $35,300,000 $66,300,000
Terminal disposal value in 2024 $ 7,500,000 $16,000,000
Useful life 7 years 7 years
Total annual cash operating costs per prototype chip $78,500 $66,000
Dublin 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. Dublin Chips’ required
There is no difference between the modernize and replace alternatives in terms of required
capital
Q. What factors should Dublin Chips consider in choosing between the alternatives?
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