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?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
icon
Concept explainers
Question

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.
Q. What factors should Dublin Chips consider in choosing between the alternatives?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education