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I am having issues find the answers to a homework question in my Managerial

Cost Accounting course. We are in the Capital Budgeting chapter. I have included photos of the problem that I have worked, but on page 4, I have circled the area I am having trouble with. Those ARE the correct numbers, but I cannot figure out how to arrive at that answer. All of my work is included. I hope someone can identify where I am going wrong!


If the corrections can be written out, that would be great! I am not allowed to use Excel on the exam, and I need to be sure that I am working it out by hand correctly. If you feel an explanation would be helpful, that would be much appreciated.













pg 1.jpg
21-34 Equipment replacement, no income taxes. 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 forecasts growth of 65 prototype chips per year 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 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 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 rate of return is 14%.
There is no difference between the modernize and replace alternatives in terms of required working capital.
Dublin Chips has a special waiver on income taxes until 2024.
Required:
1. Sketch the cash inflows and outflows of the modernize and replace alternatives over the 2018-2024 period.
2. Calculate the payback period for the modernize and replace alternatives.
3. Calculate net present value of the modernize and replace alternatives.
4. What factors should Dublin Chips consider in choosing between the alternatives?
pg 2.jpg
CHAPTER 21: CAPITAL BUDGETING
HW : 21- 34
( 1) SKETCH THE CASH IN FLOWS AND OVITLOWS OF ME MODERNIZE AND REPLACE ALTERNATIVES OVER TIME 2018- 2024 POOD
( 1 ) CASH FLOWS FOR MODERNIZING AUTUMNUC :
INST. SALE OF
UNITS
CONTRIBUTIONS
YEAR
(95,000-78, 500 # 16, 500)
AT TECNICADON
( 1 )
(2 )
(3) = (2) * 16, 5003
( 4 )
(S)
Equip
-
(35, 300,000)
-
12/ 31/18
615 x 16, 500 3 10, 147, 500
12 / 31 / 19
680 * 16, 500 = 11, 220,000
12/ 31/ 20
745 x 16, 500 12 , 292, 500
12/ 31/ 21
810 x 16, 580 = 13, 365, 000
12 /31 / 22
875 x 16,500 14, 437, 500
12/31/ 23
940 x 16, 500 = 15, 510, 000
12/ 31/ 24
1, 005 x 16, 500 = 16, 582, 500
7, 500,100
(2) 95,000- 78, 500 = 16, 500 CASH CONTRIBUTION PER PROTOTYPE
CASH FLOWS FOR REPLACEMENT AWERUARISES :
UNITS
CONTRIBUTIONS
YEAR
SOLD
(95,080- 66,000 : 29,00)
(b)
NETCASH
INVESINCUR
(1 )
(2)
( 3) = (2) * 29,000 6)
AT TERN NORWU
( 4 )
(S)
11.1 18
( 66, 300,004)
4, 200,000
12/ 301 18
615 x 29,800 17, 835, 005
2/ 31/19
680x 29, 030 =
19 , 720, 000
1213:|20
745 x 29 020 : 21, 605,000
12/30/21
810 * 29, 060 23, 490 000
12 / 3428
875* 39 00)
25, 375, 200
12/31/23
940 x 29, 010 # 27 260, AND
12/30/ 24
1, 005 8 29, 00 * 29, 145 , 1:)
16, 450 , 080
95,000-66, 000 = 29, 000 CASH CONTRIBUTIONS PER PROTOTYPE
pg 3.jpg
CHAPTER 21 : CAPITAL BUDGCHING
1 : 21- 34
( 2) CALCULATE THE PAYBACK PERIOD FOR ME MODERNIZE AND REPLACE ALTERNATIVES
2. PAYBACK PERIOD CALCULATIONS FOR MODERNIZING ALTERNANURS :
COMULANVE
MET INInAL
YEAR
CASA INFLOWS
CASH INFLING
INVESTMENT :
(2)
(3)
(4)
11.1 18
35, 304, 090
12/ 31/18
10 147, 500
10, 147, 500
. 25, 152, 500
12/81/ 19
11 220, 600
21 367,500
13, 932, 500
12 / 31 / 20
12 292 500
33, 660, 030
1, 640, OOD
12/31 / 21
13, 365, 105
40 , 725, DOD
0
PAYBACK = 3 + ( 1, 640 , 060 ; 13, 365, 000 ) =
+
0 . 12 271 = 3 . 1 2 271 OR 3 . 12 YEARS
2. PASSICE PRONO CALCULROLE FOR REPLACE ALTERNATIVE.
INVESTMENT :
CASHINFLOWS
CASHINFLOWS
UNRELAVERED AP COD OFYEAR
(1 )
(3)
(3)
(4 )
(6, 300,000-4, 200,060)
62, 100,000
12/ 31/ 18
17, 835 090
17, 835, 809
44, 265, 000
12131 / 19
19, 720, 090
24 545,BOD
12/ /21/ 20
21, 605, DOD
59, 160, 020
2, 9 40 , 800
12/31 /21
23 , 490, 020
82, 650, 045
PAY BACK = 3 + ( 2 , 940, 000 / 23, 490, 000)
3 + 0. 12 5 14 : 3. 12516 OR 3 . 13 Peace .
pg 4.jpg
CHATTER 21 : CAPITAL BISECTING
Itw: 21- 34
(3) CALCULATE NET PRESENT VALUE OF NIC MODERNIZE AND REPLACE ALTERNATIVES .
PV DISC
NET CASH
PRESENT
YEAR
FACTOR 14%%
FLOW
VALUE
(35, 300,000 )
35, 300, 000
12 / 3:408
0.877
10, 147, 500
8, 849, 358
1201/19
0.769
14. 220,000
8, 628, 180
13/31/ 20
0.675
12, 292, 500
8, 297 438
12/31/ 21
0.592
13, 365, 000
7, 912, 080
57 955 679
12/31/32
0.519
14, 437, 500
7,493, 063
12/31/23
0. 456
15. 510, DUO
7, 092, 560
12/31/39
0.400
24, 082, 500
9, 633,000
22, 635, 679
MODERNIZE ALICENANUE
PV DOSE
U Ci CASH
PRESEUr
YEAR
Facsee 14%.
FLOW
VALUE
1.00
(62, 100, 000)
( 62, 140,000)
0.877
17. 838,000
15, 641, 295
0.768
19 730, 000
15, 164, 680
12 /35 / 20
0.675
20, 605, 000
14, 583, 375
0.592
23, 490, 000
13, 906, 080
102, 953; 615
62/30/23
0.515
25 375, 080
15, 169, 628
12/20/ 23
0.456
27, 260,200
12, 430, 560
12 /30 / 24
0.408
45, 145,000 ?
18 058, 020
40 , 853, 615
pg 5.jpg
CHAPTER 21: CAPITAL BUDGETAL
Itw: 21-34
(4) WHAT FACTORS SHOULD DUBLIN CHIPS CONSIDER IN CHISOSING BORDEN TIC AL TRNATIVES .
USING THE PAYBACK PERIOD, ME MODERNIZE ALTERNATIVE IS PREFERRED, ALBEIT BY A VERY SLIGHT
MARGIN, TO THE REPLACE ALTERNATIVE. ON THE OTHER HAND, THE REPLACE ALTERNATIVE HAS A SIGNIFICANTLY
HIGHER NOV THAN THE MOOCRAZE ALTERNATIVE AND SO SHOULD OC PREFERRED. OF COURSE, MIC UPV
AMOUNTS ALE BASCO ON BEST ESTIMATES OF CASH FLOWS GOING OUT INTO THE FUTURE. DUBLIN
CHIPS SHOULD EXAMINE THE SENSITIVITY OF THE NPV AMOUNTS TO VARIATIONS IN ME ESTIMATES.
NONFINANCIAL QUALITATIVE FACTORS SHOULD ALSO BE CONSIDERED. THESE COULD INCLUDE THE QUALITY
OF THE PROTOTYPES PRODUCED BY NIC MODERNRE AND REPLACE ALTERNATIVES. THESE ALITEVADUES
HAY DIFFER IN CAPACITY AND DECIR ABILITY TO MEET SURGES IN DENAND BEYOND THE ESTIMATED
AMOUNTS. THE ALITONATIVES MAY ALSO DIFFER IN HOW WORKERS INCREASE PIEIR SHOP FLOOR -
CAPABILITIES. SUCH DIFFERENCES COULD PROVIDE LABOR FORCE EXTERNALITIES THAT CAN BC
THE SOURCE OF FUTURE BENEFITS TO DUBLIN CHIPS.

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