Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice
ID: 2756955 • 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 $1,840,000 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.
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
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= $ 49432778.80 - 29500000
= $19,932,778.80
Year
0
1
2
3
4
5
OCF
$13,764,500
$16,671,375
$14,250,943
$11,741,614
$12,148,082
Change in NWC
$6,358,200
$1,360,400
($859,200)
($1,217,200)
($1,002,400)
Capital spending
$29,500,000
Total cash flow
$29,500,000
$20,122,700
$18,031,775
$13,391,743
$10,524,414
$11,145,682
PVF
0.8547
0.7305
0.6244
0.5337
0.4561
Present value of cash flows
$29,500,000
$17,198,888.89
$13,172,455.99
$8,361,410.03
$5,616,354.04
$5,083,669.86
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
OCF
$13,764,500
$16,671,375
$14,250,943
$11,741,614
$12,148,082
Working capital
1840000
$8,198,200
$9,558,600
$8,699,400
$7,482,200
$6,479,800
Changes in working capital
$6,358,200
$1,360,400
($859,200)
($1,217,200)
($1,002,400)
2. IRR = Cash outflows/ cash inflows
= 29500000 / $73,216,314
= 0.4029
Refer to PVIFA table we get (5th year)
IRR = 20%
Year
0
1
2
3
4
5
OCF
$13,764,500
$16,671,375
$14,250,943
$11,741,614
$12,148,082
Change in NWC
$6,358,200
$1,360,400
($859,200)
($1,217,200)
($1,002,400)
Capital spending
$29,500,000
Total cash flow
$29,500,000
$20,122,700
$18,031,775
$13,391,743
$10,524,414
$11,145,682
PVF
0.8547
0.7305
0.6244
0.5337
0.4561
Present value of cash flows
$29,500,000
$17,198,888.89
$13,172,455.99
$8,361,410.03
$5,616,354.04
$5,083,669.86
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.