Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice
ID: 2712139 • Letter: A
Question
Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:
Production of the implants will require $1,850,000 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 $1,520,000 per year, variable production costs are $242 per unit, and the units are priced at $362 each. The equipment needed to begin production has an installed cost of $31,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS (MACRS Table) property. In five years, this equipment can be sold for about 10 percent of its acquisition cost. AAI is in the 34 percent marginal tax bracket and has a required return on all its projects of 17 percent.
What is the NPV of the project? (Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).)
What is the IRR? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:
Explanation / Answer
Calculation of depreciation tax shield
Year
Depreciation Basis
MACRS rate
Depreciation
Tax Rate
Depreciation tax shield
1
31500000
14.29%
4501350
34%
1530459
2
31500000
24.49%
7714350
34%
2622879
3
31500000
17.49%
5509350
34%
1873179
4
31500000
12.49%
3934350
34%
1337679
5
31500000
8.93%
2812950
34%
956403
Total
24472350
Cash flows
Sales revenue = Unit sales x price
Salvage value = 31500000 x10%
= 3,150,000
Net Salvage value = salvage value –( Salvage value –( cost of asset – total depreciation))x tax rate
= 3,150,000 –( 3,150,000 –(31,500,000 -24,472,350)) x 34%
=4,468,401
Year
0
1
2
3
4
5
Cost of asset
-31500000
Sales revenue
42173000
49051000
44707000
38553000
33485000
Variable cost
-28193000
-32791000
-29887000
-25773000
-22385000
Fixed cost
-1520000
-1520000
-1520000
-1520000
-1520000
EBIT
12460000
14740000
13300000
11260000
9580000
tax 34%
-4236400
-5011600
-4522000
-3828400
-3257200
Net cash income
8223600
9728400
8778000
7431600
6322800
Depreciation tax shield
1530459
2622879
1873179
1337679
956403
Working capital
-1850000
-1375600
868800
1230800
1013600
112400
Net Salvage value
4468401
Cash flows
-33350000
8378459
13220079
11881979
9782879
11860004
Calculation of NPV
Year
Cash flow
PV factor 17%
PV
0
-33350000
1.0000
-33350000
1
8378459
0.8547
7161076.1
2
13220079
0.7305
9657446.9
3
11881979
0.6244
7418757.8
4
9782879
0.5337
5220633.9
5
11860004
0.4561
5409480.1
NPV
1517394.7
Hence, NPV is 1517394.7.
IRR, using IRR function in excel is 18.90%.
Year
Depreciation Basis
MACRS rate
Depreciation
Tax Rate
Depreciation tax shield
1
31500000
14.29%
4501350
34%
1530459
2
31500000
24.49%
7714350
34%
2622879
3
31500000
17.49%
5509350
34%
1873179
4
31500000
12.49%
3934350
34%
1337679
5
31500000
8.93%
2812950
34%
956403
Total
24472350
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