Solve all problems in the Excel file provided.

Problem 1 . Regency Integrated Chips (RIC), a large Nashville-based technology company is evaluating a new project to manufacture a new chip.

a. The project's estimated economic life is 5 years.

b. RIC's marketing vice-president believes that annual sales would be 30,000 units if the units were priced at $6,000 each. RIC expects no growth in unit sales, and it believes that the unit price will rise by 2 percent each year.

c. The engineering department has reported that the project will require additional manufacturing space, and RIC currently has an option to purchase an existing building, at a cost of $20 million, which would meet this need. The building would be bought and paid for on December 31 of Year 0, and for depreciation purposes, it would fall into the MACRS 39- year class. The annual depreciation rate 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, and paid for on December 31 of Year 0. The equipment would fall into the MACRS 5-year class, and it would cost $10 million, including transportation and installation. The annual depreciation rate for the five years of economic life of the project would be:

Year 1	Year 2	Year 3	Year 4	Year 5
120%	32%	19%	12%	11%

e. At the end of the project, the building is expected to have a market value of $10 million and the equipment is expected to have a market value of $2 million.

f. The production department has estimated that variable manufacturing costs would be $4000 per unit, and that fixed overhead costs, excluding depreciation would be $20 million a year. They expect variable costs to rise by 3 percent per year, and fixed costs to rise by 2 percent per year. Depreciation expense would be determined in accordance with MACRS rates.

g. RIC must have an amount of NOWC on hand equal to 10 percent of the upcoming year's sales.

h. RIC's marginal tax rate is 22 percent, its cost of capital is 8 percent, and it assumes that all operating cash flows occur at the end of the year. Evaluate the project using the NPV rule and the IRR rule

Excel file

Problem 1 Evaluating a New Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project, 5 Year Life Building Purchase \"P? 3 Equipment Purchase \"P? Total Initial Investment 8 E Unit Sales ?? ?? ?? ?? ?? Price per Unit ?? \"P? ?? ?? ?? Total Sales ?? ?? ?? ?? ?? Variable Cost per Unit \"P? \"P? \"P? \"P? ?\"P Total Variable Costs \"P? \"P? \"P? \"P? ?\"P Total Fixed Costs \"P? \"P? \"P? \"P? ?\"P Depreciation Rate (39 Year) \"P? "P? "P? P? ?? Building Depreciation \"P? \"P? \"P? \"P? ?? Depreciation Rate (5 Year) \"P? \"P? \"P? \"P? ?? Equipment Depreciation \"P? \"P? \"P? \"P? ?\"P Total Depreciation Costs \"P? rP? ?? '2? ?\"P L Earnings Before Income Tax (EBIT) ?? 1'? '2? 2'? '2? Tax Rate ?? ?? "3? ?? '3? Total Taxes ?? ?? '3? ?? '3? Net Operating Prots (N OPAT) ?? ?? '9? \"P? ?? Add Back Depreciation ?? 1'? '9? '3? C"? Operating Cash Flow ?? 1'? '2? 2'? '2? NOWC Percentage Required "3? "3? ?? \"I? ?? "3? Net Operating Working Capital ?? ?? ?? '2? ?? '3? Increase in NOVVC ?? ?? ?? '2? ?? '3? Total Annual Project Cash Flow ?? Terminal Year Cash Flow Building Sale (MW Less: Book Value of Building Prot on Sale Tax on Loss (22%) Net Salvage Value on Building Equipment Sale (MVJ Less: Book Value of Equipment Prot on Sale Tax on Prot (22%) Net Salvage Value on Equipment Total Net Salvage Value Free Cash Flow Required Rate of Return WACC) '9'? NP" IRR .. N13 X v fi A B C D E F G 64 Problem 2 - Evaluating a Cost Saving Project 65 66 Year 0 Year 1 Year 2 Year 3 Year 4 67 Acquisition - 5 Year Life 68 Earth Mover ?? 69 Installation Costs ?? 70 Total Initial Investment $ 71 72 Savings in Costs ?? ?? ?? ?? 73 74 Depreciation Rate (5 Year) ?? ?? ?? ?? 75 Total Depreciation Costs ?? ?? ?? ?? 76 77 Earnings Before Income Tax (EBIT) ?? ?? ?? ?? 78 79 Tax Rate ?? ?? ?? 80 Total Taxes ?? ?? ?? 81 82 Net Operating Profits (NOPAT) ?? ?? 83 84 Add Back Depreciation ?? ?? 85 Operating Cash Flow ?? ?2 2? 86N13 X v fi A B C D E F G 87 Net Operating Working Capital ?? ?? ?? ?? ?? 88 Increase in NOWC ?? ?? ?? ?? 27 89 90 Total Annual Project Cash Flow ?? ?? ?? ?? ?2 91 92 Terminal Year Cash Flow 93 Machine Sale 94 Less: Book Value of Machine 95 Profit on Sale 96 Tax on Profit (22%) 97 Net Salvage Value on Equipment 98 99 100 Free Cash Flow 27 27 101 102 Required Rate of Return (WACC) ?? 103 104 NPV 105 106 IRR 107N13 X vfx A B C D E F G 109 Problem 3 - Evaluating a Replacement Project 110 111 Year 0 Year 1 Year 2 Year 3 Year 4 112 Acquisition - 5 Year Life 113 New Machinery ?? 114 Sale - Old Machine ?? 115 Total Initial Investment ?? 116 117 118 New Sales ?? ?? ?? ?? 119 Old Sales ?? ? ? ?? 120 Change in Sales 22 ?? ?? 121 122 New Costs ?? ?? ?? ?? 123 Old Costs ? ? ?? ?? ?? 124 Change in Costs ?? ?? ?? ?? 125 126 New Depreciation ?? ?? ?? ?? 127 Old Depreciation ?? ?? ?? ?? 128 Change in Depreciation ?? ?? ?? 129 130 Earnings Before Income Tax (EBIT) 22 ?? ?2 ?? 131 132 Tax Rate ?? ?? ?? ?? 133 Total Taxes ?? ??N13 v XV fx A B C D E F G 134 135 Net Operating Profits (NOPAT) ?? ?? ?? 136 ?? 137 Add Back Depreciation ?? ?? 138 Operating Cash Flow ?2 ?? ?? ?? 139 140 141 Net Operating Working Capital ?? ?? ?? 142 ?? ?? Increase in NOWC ?? ?? ?? ?? 143 ?? 144 Total Annual Project Cash Flow ?? ?? ? ? ? ? 145 ?? 146 147 Free Cash Flow 22 ?? ?? ?? 148 ?? Required Rate of Return (WACC) ?? NPV ?? IRR