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 $1,620,000 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 $1,470,000 per year, variable production costs are $237 per unit, and the units are priced at $357 each. The equipment needed to begin production has an installed cost of $29,000,000. 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 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

NPV is computed using formula= NPV(18%, CF from years 1-5)- CF in year 0

IRR is computed using excel IRR function

WORKING NOTE 1: Working capital requirement

Note 2: Operating Cash flows

Note 3: Salvage value of equipment

Sale price = 20%*29000000 = 5800000

Hence capital gain = 5800,000-1670,400 = 4129,600

Capital gain after tax = 2684,240

Year Initial cost of equipment Working capital Salvage of new press Operating CF Net Cash flows 0 -29000000 -1620000 -30620000 1 -1017450 9966500 8949050 2 642600 12666500 13309100 3 910350 10431300 11341650 4 749700 8325780 9075480 5 334800 2684240 7233780 10252820 NPV $            2,587,841.14 IRR 21.68%

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