Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice

Question

Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:

  

  

Production of the implants will require $1,770,000 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.

  

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

Answer: The cash flow required for the project today will be:

Total cash flow=Capital Spending+Change in NWC

=$27,500,000+$1,770,000=$29270,000

Ending book value=6135250

After tax salvage value=2750000+(6135250-2750000)*0.34=3900985

Calculation of NPV and IRR

Discount rate 17% Year 0 1 2 3 4 5 Total cash flow -29,270,000 7950515 12603815 11352915 9326615 10723940 NPV 3689452.649 IRR 22.22%

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