Regency Integrated Chips (RIC), a large Nashville-based technology company is evaluating a new project to manufacture a
Posted: Fri Jul 01, 2022 7:46 am
Regency Integrated Chips (RIC), a large Nashville-basedtechnology company is evaluating a new project to manufacture a newchip.
a. The project’s estimated economic life is 5 years.
b. RIC’s marketing vice-president believes that annual saleswould be 30,000 units if the units were priced at $6,000 each. RICexpects no growth in unit sales, and it believes that the unitprice will rise by 3 percent each year.
c. The engineering department has reported that the project willrequire additional manufacturing space, and RIC currently has anoption to purchase an existing building, at a cost of $20 million,which would meet this need. The building would be bought and paidfor on December 31 of Year 0, and for depreciation purposes, itwould fall into the MACRS 39- year class. The annual depreciationrate for the five years of economic life of the project would be:Year 1 Year 2 Year 3 Year 4 Year 5 1.3% 2.6% 2.6% 2.6% 2.6%
d. The necessary equipment would be purchased, installed, andpaid for on December 31 of Year 0. The equipment would fall intothe MACRS 5-year class, and it would cost $10 million, includingtransportation and installation. The annual depreciation rate forthe five years of economic life of the project would be: Year 1Year 2 Year 3 Year 4 Year 5 20% 32% 19% 12% 11%
e. At the end of the project, the building is expected to have amarket value of $10 million and the equipment is expected to have amarket value of $2 million.
f. The production department has estimated that variablemanufacturing costs would be $4000 per unit, and that fixedoverhead costs, excluding depreciation would be $20 million a year.They expect variable costs to rise by 3 percent per year, and fixedcosts to rise by 2 percent per year. Depreciation expense would bedetermined in accordance with MACRS rates.
g. RIC must have an amount of NOWC on hand equal to 10 percentof the upcoming year’s sales. h. RIC’s marginal tax rate is 25percent, its cost of capital is 12 percent, and it assumes that alloperating cash flows occur at the end of the year. What is the NPVand IRR?
a. The project’s estimated economic life is 5 years.
b. RIC’s marketing vice-president believes that annual saleswould be 30,000 units if the units were priced at $6,000 each. RICexpects no growth in unit sales, and it believes that the unitprice will rise by 3 percent each year.
c. The engineering department has reported that the project willrequire additional manufacturing space, and RIC currently has anoption to purchase an existing building, at a cost of $20 million,which would meet this need. The building would be bought and paidfor on December 31 of Year 0, and for depreciation purposes, itwould fall into the MACRS 39- year class. The annual depreciationrate for the five years of economic life of the project would be:Year 1 Year 2 Year 3 Year 4 Year 5 1.3% 2.6% 2.6% 2.6% 2.6%
d. The necessary equipment would be purchased, installed, andpaid for on December 31 of Year 0. The equipment would fall intothe MACRS 5-year class, and it would cost $10 million, includingtransportation and installation. The annual depreciation rate forthe five years of economic life of the project would be: Year 1Year 2 Year 3 Year 4 Year 5 20% 32% 19% 12% 11%
e. At the end of the project, the building is expected to have amarket value of $10 million and the equipment is expected to have amarket value of $2 million.
f. The production department has estimated that variablemanufacturing costs would be $4000 per unit, and that fixedoverhead costs, excluding depreciation would be $20 million a year.They expect variable costs to rise by 3 percent per year, and fixedcosts to rise by 2 percent per year. Depreciation expense would bedetermined in accordance with MACRS rates.
g. RIC must have an amount of NOWC on hand equal to 10 percentof the upcoming year’s sales. h. RIC’s marginal tax rate is 25percent, its cost of capital is 12 percent, and it assumes that alloperating cash flows occur at the end of the year. What is the NPVand IRR?