Question

Dublin Chips is a mnaufacturer of silicon wafer chips with applications in consumer electronic products. Next year, Dublin expects to deliver 650,000 chips at an average price of $98.00 per chip. The VP of marketing expects sales to grow at 65,000 chips per year for the next three years. Current manufacturing capacity is 585,000 chips per year. In order to meet demand for the next five years, Dublin will have to purchase new equipment at a cost of $25,800,000. The estimated disposal value of the equipment is $4,500,000. The company uses straight line depreciation for tax purposes and depreciates equipment to zero book value over its estimated useful life. The annual variable manufacturing costs for chips using this equipment are $73.00 per chip. Fixed manufacturing costs are $5,500,000 per year. The cost of capital for projects with this risk profile is 14.4%. The income tax rate is 35%. What is the NPV of this project? acquisition cost of equipment $25,800,000 selling price per chip $98.00 estimated disposal value $4,500,000 variable manufacturing cost per chip $73.00 next years sales volume 650,000 income tax rate 35.0% 65,000 cost of capital 14.4% annual growth (#chips) fixed manufacturing costs $5,500,000 estimated useful life 3 depreciation $8,600,000

Answer 1

A D E F 3 1 2 3 4 5 6 7 8 9 Year Units Sold Selling Price per Chip Variable Cost per Chip B С a. Calculation of the NPV of the Project :- 0 1 650000 $ 98.00 $ $ 73.00 $ 2 715000 98.00 $ 73.00 $ 780000 98.00 73.00 G H Calculation of Equipment's After tax Salvage Value : Purchase cost of Equipment $25,800,000 Less : Depreciation $ 25,800,000 WDV of the Equipment at the time of sale $0 Disposal Value $4,500,000 Gain on sale of Equipment $4,500,000 Tax 35% $1,575,000 Equipment's After tax Net salvage value $2,925,000 Revenue Variable Manufacturing Costs Fixed Manufacturing Costs Depreciation Profit Before Tax Less : Tax @ 35% Profit After tax Add : Depreciation Operating Cash Flow $ S $ $ $ $ $ $ S 63,700,000 $ 47,450,000 $ 5,500,000 $ 8,600,000 $ 2,150,000 $ 752,500 $ 1,397,500 $ 8,600,000 $ 9,997,500 $ 70,070,000 $ 52,195,000 $ 5,500,000 $ 8,600,000 $ 3,775,000 $ 1,321,250 $ 2,453,750 $ 8,600,000 $ 11,053,750 $ 76,440,000 56,940,000 5,500,000 8,600,000 5,400,000 1,890,000 3,510,000 8,600,000 12,110,000 10 11 12 13 14 15 16 17 18 19 20 21 Equipment $ $ (25,800,000) $ 2,925,000 Equipment's After tax Net salvage value Total Cash Flows PV at 14.4% PV of Cash Flows NPV of the Project $ (25,800,000) $ 9,997,500 $ 11,053,750 $ 15,035,000 1.0000 0.8741 0.7641 0.6679 $ (25,800,000.00) $ 8,738,814.75 $ 8,446,170.38 $ 10,041,876.50 $ 1,426,861.63 22 22

Formula View :-

А E F 1 2 3 4 Year Units Sold Selling Price per Chip Variable Cost per Chip B с D a. Calculation of the NPV of the Project :- lo 1 2 =585000+65000 =C3+65000 98 98 173 73 3 =D3+65000 98 73 G H Calculation of Equipment's After tax Salvage Value:- Purchase cost of Equipment 25800000 Less : Depreciation =SUM(C10:E10) WDV of the Equipment at the time of sale =H2-H3 Disposal Value 4500000 Gain on sale of Equipment =H5-H4 Tax 35% =H6*35% Equipment's After tax Net salvage value =H5-H7 5 6 7 8 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Revenue Variable Manufacturing Costs Fixed Manufacturing Costs Depreciation Profit Before Tax Less : Tax @ 35% Profit After tax Add : Depreciation Operating Cash Flow =C3*C4 =C3*C5 5500000 =25800000/3 =C7-C8-C9-C10 =C11*35% =C11-C12 =C10 1=C13+C14 =D3*D4 =E3 E4 1=D3*D5 =E3*E5 5500000 5500000 =25800000/3 =25800000/3 =D7-08-09-D10 =E7-E8-E9-E10 =D11*35% =E11*35% =D11-D12 =E11-E12 =D10 =E10 =D13+D14 =E13+E14 Equipment -25800000 =H8 Equipment's After tax Net salvage value Total Cash Flows PV at 14.4% PV of Cash Flows NPV of the Project =SUM(B15:B17) =SUM(C15:C17) 1 0.8741 =B19*B20 =C19*C20 =SUM(B21:E21) =SUM(D15:017) JESUM(E15:E17) 0.7641 0.6679 =D19*D20 =E19*E20 22 23