Question

In: Economics

Alpha Semiconductor Co. is evaluating whether to add another IC production line. The line would cost...

Alpha Semiconductor Co. is evaluating whether to add another IC production line. The line would cost $50000 and would have no market value at the end of its 7 year life. The facility would be depreciated using straight line depreciation. Gross income (GI) and annual operating costs (AOC) are expected to be $12500 and $4000 in year 1, respectively. GI and AOC are expected to increase by $500 per year for the next 6 years. The company’s effective tax rate is 40% and it uses an after-tax MARR of 15%. Is it worthwhile to invest?
Dt=

Year
P
GI
E
CFBT
D
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T
CFAT
0
1
2
3
4
5
6
7
D=
DR=
CG=
CL=

Solutions

Expert Solution

Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Cost of Equipment            -50,000
Revenue           12,500           13,000           13,500           14,000           14,500           15,000           15,500
AOC             4,000             4,500             5,000             5,500             6,000             6,500             7,000
Depreciation Rate 14.29% 14.29% 14.29% 14.29% 14.29% 14.29% 14.29%
Depreciation               7,143             7,143             7,143             7,143             7,143             7,143             7,143
Net Profit             1,357             1,357             1,357             1,357             1,357             1,357             1,357
Tax @ 40%                543                543                543                543                543                543                543
Net Profit after tax                814                814                814                814                814                814                814
Add Depreciation
Cash Flows after tax            -50,000             7,957             7,957             7,957             7,957             7,957             7,957             7,957
PVF @15%                       1             0.870             0.756             0.658             0.572             0.497             0.432             0.376
PV of Cash flows            -50,000             6,919             6,017             5,232             4,550             3,956             3,440             2,991
NPV            -19,886

Depreciation Rate = 100%/7 => 14.29%.

As project is yielding negative NPV it is not recommended to proceed with this.

Thanks!!.

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