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:

Year Unit Sales

1 87,500

2 105000

3 119000

4 108,000

5 92000

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 $1,450,000 per year, variable production costs are $230 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $24,000,000. 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 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.

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. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal Rate of Return?

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

Explanation / Answer

Depreciation

1 2 3 4 5 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sales Units -2,40,00,000 87500 105000 119000 108000 92000 Contribution 355 355 355 355 355 355 Sales 31062500 37275000 42245000 38340000 32660000 Variable Cost 20125000 24150000 27370000 24840000 21160000 Fixed Csot 1450000 1450000 1450000 1450000 1450000 Depreciation 3429600 5877600 4197600 2997600 2143200 EBIT 6057900 5797400 9227400 9052400 7906800 TAX 2120265 2029090 3229590 3168340 2767380 Net income 3937635 3768310 5997810 5884060 5139420 ADD Depreciation 3429600 5877600 4197600 2997600 2143200 Operating cash flow 7367235 9645910 10195410 8881660 7282620 Operating cash flow 7367235 9645910 10195410 8881660 7282620 NWC -1500000 -931875 -745500 585750 852000 1793952 Capital spending 49,94,040 Total Cash flow -2,55,00,000 6435360 8900410 10781160 9733660 1,40,70,612 PV factor 1 0.8475 0.7182 0.6086 0.5158 0.4371 Present Value -25500000 5453695 6392135.88 6561747 5020514 6150394.183 NPV 4078485.34 IRR Using excel Calculator =IRR(-25500000 to14070612) 24.08%

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