Year Unit Sales 1 80,000 2 93,000 3 107,000 4 102,000 5 83,000 Production of the
ID: 2648528 • Letter: Y
Question
Year
Unit Sales
1
80,000
2
93,000
3
107,000
4
102,000
5
83,000
Production of the implants will require $1,590,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $1,490,000 per year, variable production costs are $260 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of $20,900,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 19 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?
Year
Unit Sales
1
80,000
2
93,000
3
107,000
4
102,000
5
83,000
Explanation / Answer
Calculation of NPV Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Units sales 80000 93000 107000 102000 83000 Annual sales = Unts *$375 $ 30,000,000.00 $ 34,875,000.00 $ 40,125,000.00 $ 38,250,000.00 $ 31,125,000.00 Less: variable cost ($260 * units) $ (20,800,000.00) $ (24,180,000.00) $ (27,820,000.00) $ (26,520,000.00) $ (21,580,000.00) Less: Fixed Cost $ (1,490,000.00) $ (1,490,000.00) $ (1,490,000.00) $ (1,490,000.00) $ (1,490,000.00) Less: Depreciation MACRS Dep% 14.29% 24.49% 17.49% 12.49% 8.93% Depreciation = Assets cost (20900000) * Dep % $ (2,986,610.00) $ (5,118,410.00) $ (3,655,410.00) $ (2,610,410.00) $ (1,866,370.00) Income before tax $ 4,723,390.14 $ 4,086,590.24 $ 7,159,590.17 $ 7,629,590.12 $ 6,188,630.09 Less: tax = Income before tax *30% $ (1,417,017.04) $ (1,225,977.07) $ (2,147,877.05) $ (2,288,877.04) $ (1,856,589.03) Income after tax $ 3,306,373.10 $ 2,860,613.17 $ 5,011,713.12 $ 5,340,713.09 $ 4,332,041.06 Add: depreciation $ 2,986,610.00 $ 5,118,410.00 $ 3,655,410.00 $ 2,610,410.00 $ 1,866,370.00 Cash flows $ 6,292,983.10 $ 7,979,023.17 $ 8,667,123.12 $ 7,951,123.09 $ 6,198,411.06 installed cost $ (20,900,000.00) initial investment in net working capital $ (1,590,000.00) Increase in sales $ 4,875,000.00 $ 5,250,000.00 $ (1,875,000.00) $ (7,125,000.00) Additional investment in net working capital (20% of Sales increase for following year) $ (975,000.00) $ (1,050,000.00) $ - $ - $ - Sale value of fixed asset = 25% *20900000 $ 5,225,000.00 Tax Saving on capial loss from sale $ 2,467,500.00 [Sale value -(Cost - total Dep)] $ (7,450,000.00) [5225000 - (20900000 - 7450000) ]*30% Net cash flows $ (29,940,000.00) $ 5,317,983.10 $ 11,804,023.17 $ 21,609,623.12 $ 6,076,123.09 $ (926,588.94) PVF (19%) 1 0.840336134 0.706164819 0.593415814 0.498668751 0.419049371 PV= Net csah flow * PVF $ (29,940,000.00) $ 4,468,893.36 $ 8,335,585.88 $ 12,823,492.10 $ 3,029,972.71 $ (388,286.51) NPV = (Sumof PVs) $ (1,670,342.45) IRR (using =IRR () formula 16.27%
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