How did they get net cash inflow in this problem? I don't need anything else solved, just need to know how they got the net cash inflow because the text doesn't explain it.
How did they get net cash inflow in this problem? I don't need anything else solved, just need to know how they got the net cash inflow because the text doesn't explain it.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
How did they get net
I don't need anything else solved, just need to know how they got the net cash inflow because the text doesn't explain it.
Transcribed Image Text:Expert Chips is a manufacturer of prototype chips based in Buffalo, New York.
A(Click the icon to view the prototype chips information.)
E (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 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
$ (34,400,000)
After-tax cash flows from operations:
Dec 31, 2021
0.893
2$
4,760,000
4,250,680
%3D
Dec 31, 2022
0.797
5,440,000
4,335,680
%3D
Dec 31, 2023
0.712
6,120,000
4,357,440
%3D
Dec 31, 2024
0.636
6,800,000
4,324,800
%3D
Dec 31, 2025
0.567
7,480,000
4,241,160
Dec 31, 2026
0.507
8,160,000
4,137,120
Dec 31, 2027
0.452
8,840,000
3,995,680
%3D
Transcribed Image Text:More info
Data table
The following data on the two options are available:
Next year, in 2021, Expert Chips expects to deliver 595 prototype chips at an
average price of $62,000. Expert Chips' marketing vice president forecasts growth
of 85 prototype chips per year through 2027. That is, demand will be 595 in 2021,
680 in 2022, 765 in 2023, and so on.
Modernize
Replace
Initial investment in 2021
$
34,400,000 $
64,500,000
Terminal disposal value in 2027
6,400,000 $
15,000,000
The plant cannot produce more than 580 prototype chips annually. To meet future
demand, Expert Chips must either modernize the plant or replace it. The old
equipment is fully depreciated and can be sold for $3,900,000 if the plant is
replaced. If the plant is modernized, the costs to modernize it are to be capitalized
and depreciated
retained as part of the "modernize" alternative.
Useful life
7 years
7 years
Total annual cash operating cost per prototype chip
46,000 $
36,000
the useful life of the modernized plant. The old equipm
is
Expert 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. Expert Chips' required rate of
return is 12%. There is no difference between the "modernize" and "replace" alternatives in terms of
required working capital. Expert Chips pays a 50% tax rate on all income. Proceeds from sales of
equipment above book value are taxed at the same 50% rate.
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