Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice
ID: 2756952 • Letter: A
Question
Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 114,500 2 133,500 3 121,500 4 104,500 5 90,500 Production of the implants will require $1,840,000 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 $1,480,000 per year, variable production costs are $238 per unit, and the units are priced at $358 each. The equipment needed to begin production has an installed cost of $29,500,000. 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. Required: 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) Year 0 1 2 3 4 5 OCF $ Change in NWC Capital spending Total cash flow What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Net present value $ What is the IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Internal rate of return %
Explanation / Answer
Present value of cash outflow
Particulars
PV (amount)
Initial investment (capital spending)
$29,500,000
Working capital
$1,840,000
PVF (at Y=0)
1
Present value of cash outflow
$31,340,000
Present value of cash Inflow
Particulars
Year 1
Year 2
Year3
Year4
Year5
Sales units
114,500
133,500
121,500
104,500
90,500
Sales price per unit
$358
$358
$358
$358
$358
Cost per unit
$238
$238
$238
$238
$238
Sales units
114,500
133,500
121,500
104,500
90,500
Contribution per unit
$120
$120
$120
$120
$120
Total Contribution
$13,740,000
$16,020,000
$14,580,000
$12,540,000
$10,860,000
Less- Fixed cost
$1,480,000
$1,480,000
$1,480,000
$1,480,000
$1,480,000
Add-- tax savings due to depreciation @37%
1504500
2131375
1150942.5
681613.725
410541.19
Add- scrapped value (net of tax)
-
2357541
Less- changes in net working capital
$8,198,200
$9,558,600
$8,699,400
$7,482,200
$6,479,800
Net annual cash flow
$5,566,300
$7,112,775
$5,551,543
$4,259,414
$5,668,282
Present value factor (17%)
0.8547
0.8547
0.8547
0.8547
0.8547
PRESENT VALUE OF CASH INFLOW
4757521.37
6079294.87
4744908.12
3640524.55
4844685.63
Total PV of cash inflow = $ 24066934
Depreciation
1. 15% = 4425000
2. 25% = 6268750
3. 18% = 3385125
4 13% = 2004746.25
5. 9% = 1207474.088
6 9% = 1098801.42
7 9% = 999909.2919
sale of equipment $2,950,000
Value 1207474
Net gain 1742526
Tax @34% 592459
scrap value (net of tax) 2357541
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= $ 24066934 + 1572648 - 31340000
= -5700418
Particulars
PV (amount)
Initial investment (capital spending)
$29,500,000
Working capital
$1,840,000
PVF (at Y=0)
1
Present value of cash outflow
$31,340,000
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