Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice
ID: 2760889 • Letter: A
Question
Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales
1 112,500
2 131,500
3 119,500
4 102,500
5 88,500
Production of the implants will require $1,770,000 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 $1,440,000 per year, variable production costs are $234 per unit, and the units are priced at $354 each. The equipment needed to begin production has an installed cost of $27,500,000. 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
This is an in-depth capital budgeting problem. We will use the bottom up approach, so we will need to construct an income statement for each year. Beginning with the initial cash flow at time zero, the project will require an investment in equipment. The project will also require an investment in NWC. The NWC investment will be 15 percent of the next year’s sales. In this case, it will be Year 1 sales. Realizing we need Year 1 sales to calculate the required NWC capital at time 0, we find that Year 1 sales will be $39,536,000. So, the cash flow required for the project today will be:
Capital Spending = -$27,500,000
Change in NWC = -$1,770,000
Total cash flow = -$29,270,000
Now we can begin the remaining calculations. Sales figures are given for each year, along with the price per unit. The variable costs per unit are used to calculate total variable costs, and fixed costs are given at $1,430,000 per year. To calculate depreciation each year, we use the initial equipment cost of $27.0 million, times the appropriate MACRS depreciation each year. The remainder of each income statement is calculated below. Notice at the bottom of the income statement we added back depreciation to get the OCF for each year. The section labeled "Net cash flows" will be discussed below
Sales
Sales in units 112500 131500 119500 102500 88500 Year 1 2 3 4 5 Ending Book value 18,856,200 13,468,400 9,620,600 6,872,800 4,908,200Sales
39,825,000 46,551,000 42,303,000 36,285,000 31,329,000 Less:- Variable cost 26,325,000 30,771,000 27,963,000 23,985,000 20,709,000 Fixed cost 1,440,000 1,440,000 1,440,000 1,440,000 1,440,000 Depreciation 3,143,800 5,387,800 3,847,800 2,747,800 1,964,600 EBIT 8,916,200 8,952,200 9,052,200 8,112,200 7,215,400 Taxes 3,031,508 3,043,748 3,077,748 2,758,148 2,453,236 Net income 5,884,692 5,908,452 5,974,452 5,354,052 4,762,164 Depreciation 3,143,800 5,387,800 3,847,800 2,747,800 1,964,600 Operating cash flow 9,028,492 11,296,252 9,822,252 8,101,852 6,726,764Related Questions
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