Question: Equipment replacement, income taxes. Assume the same facts as in Problem, except that the plant is located in Buffalo, New York. Dublin Chips has no special waiver on income taxes. It pays a 35% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 35% rate.

1. Sketch the after-tax cash inflows and outflows of the modernize and replace alternatives over the 2018-2024 period.

2. Calculate the net present value of the modernize and replace alternatives.

3. Suppose Dublin Chips is planning to build several more plants. It wants to have the most advantageous tax position possible. Dublin Chips has been approached by Spain, Malaysia, and Australia to construct plants in their countries. Use the data in Problem 21-34 and this problem to briefly describe in qualitative terms the income tax features that would be advantageous to Dublin Chips.

Problem: 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:

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.

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?