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 1 110,500 2 129,500 3 117,500 4 100,500 5 86,500 Production of the implants will require $1,750,000 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 $1,400,000 per year, variable production costs are $230 per unit, and the units are priced at $350 each. The equipment needed to begin production has an installed cost of $25,500,000. 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)

Explanation / Answer

Depreciation = Investment x MACRS %

Operating Cash Flows (OCF) = Net Income + Depreciation + Change in Working Capital

Total Cash Flows = OCF + Investment + Salvage Value

The cash flows mentioned in the table above are total cash flows, but investment and salvage values are reflected only in year 0 and 5. Hence, the cash flows for year 1 to 4 are OCF.

AAI 0 1 2 3 4 5 MACRS 14.29% 24.49% 17.49% 12.49% 8.93% Unit Sales 110500 129500 117500 100500 86500 Investment -$    25,500,000 NWC -$      1,750,000 -$ 1,330,000 $      840,000 $   1,190,000 $      980,000 $        70,000 Salvage $   2,550,000 Sales $ 38,675,000 $ 45,325,000 $ 41,125,000 $ 35,175,000 $ 30,275,000 VC -$25,415,000 -$29,785,000 -$27,025,000 -$23,115,000 -$19,895,000 FC -$ 1,400,000 -$ 1,400,000 -$ 1,400,000 -$ 1,400,000 -$ 1,400,000 Depreciation -$ 3,643,950 -$ 6,244,950 -$ 4,459,950 -$ 3,184,950 -$ 2,277,150 EBT $   8,216,050 $   7,895,050 $   8,240,050 $   7,475,050 $   6,702,850 Taxes (34%) -$ 2,793,457 -$ 2,684,317 -$ 2,801,617 -$ 2,541,517 -$ 2,278,969 Net Income $   5,422,593 $   5,210,733 $   5,438,433 $   4,933,533 $   4,423,881 Cash Flows -$    27,250,000 $   7,736,543 $ 12,295,683 $ 11,088,383 $   9,098,483 $   9,321,031 NPV $ 4,374,684.91 IRR 23.70%

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