Annual Depreciation Rate

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Assignment 9 Estimating Cash Flows
Due date: November 20, 2011 Instruction: Please submit your assignment as an attachment by midnight on the due date

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. b. The project’s estimated economic life is 5 years. RIC’s marketing vice-president believes that annual sales would be 30,000 units if the units were priced at $3,000 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 $10 million, which would meet this need. The building would be bought and paid for on December 31, 2008, 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 1.3% Year 2 2.6% Year 3 2.6% Year 4 2.6% Year 5 2.6%

d.

The necessary equipment would be purchased and installed in late 2008, and it would also be paid for on December 31, 2008. The equipment would fall into the MACRS 5-year class, and it would cost $5 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

20%

32%

19%

12%

11%

e.

At the end of the project, the building is expected to have a market value of $5 million and the equipment is expected to have a market value of $1 million.

f.

The production department has estimated that variable manufacturing costs would be $2000 per unit, and that fixed overhead costs, excluding depreciation would be $10 million a year. They expect variable costs to rise by 2 percent per year, and fixed costs to...
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