Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice

Question

Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:

  

  

Production of the implants will require $2,300,000 in net working capital to start and additional net working capital investments each year equal to 25 percent of the projected sales increase for the following year. Total fixed costs are $1,370,000 per year, variable production costs are $227 per unit, and the units are priced at $347 each. The equipment needed to begin production has an installed cost of $24,000,000. 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 20 percent of its acquisition cost. AAI is in the 40 percent marginal tax bracket and has a required return on all its projects of 16 percent.

  

What are operating cash flows, change in net working capital, capital spending, and total cash flow for each year of the project? (Do not round intermediate calculations. Enter a minus sign to indicate a cash outflow. Enter a zero where required. Round your answer to the nearest whole number (e.g., 32)

   

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. Round your answer 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

Solution :

I would like to explain in 2 tables everything.

Step 1: cash flow computation :

Step 2:

Computation of Net working capital and also NPV :

Net working capital would be :

Salvage value at end of 5th year would be = 24000000*20% = 4800000

To compute the NPV:

Hence NPV = 2563880

To compute the IRR is the one when NPV is zero :

Hence the discount rate to increase so that the NPV can fall to zero :

At 19.7% NPV is close to zero hence the IRR is 19.7%

Thank you.

step 1 : Formulas 1 2 3 4 5 No of unit sold 109000 128000 116000 99000 85000 Sales = unit *347 37823000 44416000 40252000 34353000 29495000 cost= no of unit *227 24743000 29056000 26332000 22473000 19295000 Gross profit = sales - cost 13080000 15360000 13920000 11880000 10200000 Fixed cost 1370000 1370000 1370000 1370000 1370000 Depreciation MACRS table % % of depreciation are 14.29% 24.49% 17.49% 12.49% 8.93% 24000000*rate 3429600 5877600 4197600 2997600 2143200 profit before tax=gross- fixed -dep 8280400 8112400 8352400 7512400 6686800 tax rate 40% 3312160 3244960 3340960 3004960 2674720 Profit after tax 4968240 4867440 5011440 4507440 4012080 Cash flow = profit after tax + depreciation 8397840 10745040 9209040 7505040 6155280

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