Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice
ID: 2644253 • 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 $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $2,400,000 per year, variable production costs are $190 per unit, and the units are priced at $345 each. The equipment needed to begin production has an installed cost of $23,000,000. 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 20 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. MACRS schedule.
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))
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Explanation / Answer
NPV of the project is difference between present value of cash outflow and cash inflow. Following tables give the detailed calculation of the same:
NPV = Present Value of Inflow - Present Value of Outflow = $ 30,676,791.42 - $ 25,340,695.92 = $ 5,336,095.50
Statement showing present value of outflow
Particulars
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Equipment Cost
$ 23,000,000
$ -
$ -
$ -
$ -
$ -
Working Capital
$ 1,500,000
$ -
$ -
$ -
$ -
$ -
Additional Working Capital outflow
$ -
$ 465,750
$ 621,000
$ -
$ -
$ -
Total Outflow (A)
$ 24,500,000
$ 465,750
$ 621,000
$ -
$ -
$ -
Present Value of $ 1 at 18% (B)
$ 1
$ 0.847458
$ 0.718184
$ 0.608631
$ 0.515789
$ 0.437109
Present Value of outflow (A*B)
$ 24,500,000
$ 394,703.39
$ 445,992.53
$ -
$ -
$ -
Statement showing present value of inflow
Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
Sale Price per unit (A)
$ 345
$ 345
$ 345
$ 345
$ 345
Variable Cost per unit (B)
$ 190
$ 190
$ 190
$ 190
$ 190
Contribution per unit (A-B) ( C )
$ 155
$ 155
$ 155
$ 155
$ 155
Projected Sales in units (D)
83000
92000
104000
98000
84000
Total Contribution (C*D) (E)
$ 12,865,000
$ 14,260,000
$ 16,120,000
$ 15,190,000
$ 13,020,000
Less Fixed Cost (F)
$ 2,400,000
$ 2,400,000
$ 2,400,000
$ 2,400,000
$ 2,400,000
Less Depreciation (G)
$ 4,105,500
$ 5,398,100
$ 3,854,800
$ 2,753,100
$ 2,040,100
Add: Sale of fixed asset (H)
$ -
$ -
$ -
$ -
$ 4,600,000
Earning before tax and interest (E-F-G+H)
$ 6,359,500
$ 6,461,900
$ 9,865,200
$ 10,036,900
$ 13,179,900
Less: Tax at 35%
$ 2,225,825
$ 2,261,665
$ 3,452,820
$ 3,512,915
$ 4,612,965
Net earning after tax (I)
$ 4,133,675
$ 4,200,235
$ 6,412,380
$ 6,523,985
$ 8,566,935
Add: Depreciation (J)
$ 4,105,500
$ 5,398,100
$ 3,854,800
$ 2,753,100
$ 2,040,100
Total Operating Cash Inflow (I+J) (K)
$ 8,239,175
$ 9,598,335
$ 10,267,180
$ 9,277,085
$ 10,607,035
Working Capital refund (L)
$ -
$ -
$ -
$ -
$ 2,586,750
Total Cash Inflow (K+L) (M)
$ 8,239,175
$ 9,598,335
$ 10,267,180
$ 9,277,085
$ 13,193,785
Present Value of $ 1 at 18% (N)
$ 0.8474576
$ 0.7181844
$ 0.6086309
$ 0.5157889
$ 0.4371092
Present Value of cash inflow (M*N)
$ 6,982,351.69
$ 6,893,374.75
$ 6,248,922.72
$ 4,785,017.24
$ 5,767,125.02
Assumption: Equipment needed to begin production was serviced in second quarter and hence Mid quarter convention is used
Particulars
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Equipment Cost
$ 23,000,000
$ -
$ -
$ -
$ -
$ -
Working Capital
$ 1,500,000
$ -
$ -
$ -
$ -
$ -
Additional Working Capital outflow
$ -
$ 465,750
$ 621,000
$ -
$ -
$ -
Total Outflow (A)
$ 24,500,000
$ 465,750
$ 621,000
$ -
$ -
$ -
Present Value of $ 1 at 18% (B)
$ 1
$ 0.847458
$ 0.718184
$ 0.608631
$ 0.515789
$ 0.437109
Present Value of outflow (A*B)
$ 24,500,000
$ 394,703.39
$ 445,992.53
$ -
$ -
$ -
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