Question 1: Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-
ID: 2629149 • Letter: Q
Question
Question 1:
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
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. Refer to Property Class Chart
Property class
year
three-year
five- year
seven- year
1
33.33%
20.00%
14.29%
2
44.45
32.00
24.49
3
14.81
19.20
17.49
4
7.41
11.52
12.49
5
11.52
8.93
6
5.76
8.92
7
8.93
8
4.46
a- What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
b- What is the IRR? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Year
Unit Sales
1
80,000
2
93,000
3
107,000
4
102,000
5
83,000
Explanation / Answer
0 1 2 3 4 5 Initial Cost -20900000 Annual unit sales 80000 93000 107000 102000 83000 Annual sales 30000000 34875000 40125000 38250000 31125000 Annual variable costs -20800000 -24180000 -27820000 -26520000 -21580000 Annual fixed cost -1490000 -1490000 -1490000 -1490000 -1490000 Depreciation % 14.29% 24.49% 17.49% 12.49% 8.93% Depreciation (2,986,610.00) (5,118,410.00) (3,655,410.00) (2,610,410.00) (1,866,370.00) Net incmoe 3306373 2860613 5011713 5340713 4332041 Increase in NWC -1590000 -975000 -1050000 0 0 0 After tax Salvage value 5056337 Recovery of NWC 3615000 Net cash flows -22490000 5,317,983.00 6,929,023.00 8,667,123.00 7,951,123.00 14,869,748.00 a. NPV $2,211,268.52 b. IRR 22.69%
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