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 $1,570,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,420,000 per year, variable production costs are $232 per unit, and the units are priced at $352 each. The equipment needed to begin production has an installed cost of $26,500,000. 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 30 percent marginal tax bracket and has a required return on all its projects of 15 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

Year/Description 0 1 2 3 4 5 Quantity of sales 111500 130500 118500 101500 87500 Contribution=Quantity*(SP-VC)-FC=Quantity*(352-232)-1420000 12071500 14370500 12918500 10861500 9167500 Operating Income after Tax=(1-Tax)*Contribution=(1-0.30)*Contribution (A) 8450050 10059350 9042950 7603050 6417250 Depriciation Rate MACRS 14.29% 24.49% 17.49% 12.49% 8.93% Depriciation Tax Shield=26500000*Rate of Depriciation*Tax Rate (B) 1136055 1946955 1390455 992955 709935 Initial Investment on equipment© -26500000 Net Working Capital -1570000 1570000 Additional Working Capital -3935950 -4606650 -4183050 -3582950 -3088750 Total Change in Working Capital (D) -1570000 -3935950 -4606650 -4183050 -3582950 -1518750 Book Value of the equipment after 5years=(1-0.1429-0.2449-0.1749-0.1249-0.0893)*26500000 5912150 Sale Price at 5years=0.10*26500000 2650000 Loss from Salvage Value=2650000-5912150 (E) -3262150 Cash Flow=A+B+C+D+E -28070000 5650155 7399655 6250355 5013055 2346285 Discounted Cash flow@15% -28070000 4913178 5595202 4109710 2866230 1166518 NPV=sum of cash flow -9419161 IRR by using excel formulae -2%

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