Please show work!! Alpha Semiconductor Co. is evaluating whether to add another
ID: 1194858 • Letter: P
Question
Please show work!!
Alpha Semiconductor Co. is evaluating whether to add another IC production line. The line would cmt $56,000 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 (Gl) is expected to be $25,000 per year for 7 years, and annual operating costs (AOC) arc estimated to be $8,000 per year for 7 years. The company's effective tax rate is 40% and it uses an after-tax MARR of 15%. Is it worthwhile to invest?Explanation / Answer
Working notes:
(1) Annual depreciation = $56,000 / 7 = $8,000
(2) CFBT = GI - AOC (E) = $(25,000 - 8,000) = $17,000
(3) TI = CFBT - D = $(17,000 - 8,000) = $9,000
(4) T = 0.4 x TI = 0.4 x $9,000 = $3,600
(5) CFAT (Cash Flow After Tax) = TI - T + D** = $(9,000 - 3,600 + 8,000) = $13,400
** Depreciation is a non-cash expense. So, to obtain cash flow after tax, we need to add back depreciation.
Accordingly, the NPV table is as follows. (All values in $ excess discount factor)
Since NPV = - $250 < 0, the project is not acceptable.
Year P GI E CFBT D TI T CFAT Discount Factor @15% Discounted CFAT 0 -56,000 -56,000 1.0000 -56,000 1 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.8696 11,652 2 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.7561 10,132 3 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.6575 8,811 4 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.5718 7,661 5 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.4972 6,662 6 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.4323 5,793 7 25,000 8,000 17,000 8,000 9,000 3,600 13,400 0.3759 5,038 NPV = -250