Question

Question 3. (25 marks) Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 91,000 106,000 1 2 111,000 3 104,500 4 5 81,000 Production of the implants will require $1,600,000 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 $1,500,000 per year, variable production costs are $265 per unit, and the units are priced at $380 each. The equipment needed to begin production has an installed cost of $21,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acqui- sition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on these preliminary project estimates, what is the NPV of the project?

Answer 1

Answer

1 2 3 4 5 0 $ -21,000,000 Year Initial Investment Sales Unit Sale Value @380 Less - variable cost @265 Less :- Fixed Cost Less :Dep Income Less :-tax @ 35% Income after tax Add :- Depreciation Cash Flow Working capital After tax salvage value Net cash flow Pvf @18% PV $ $ $ $ $ $ $ $ $ -1,600,000 $ 91000 34,580,000 $ 24,115,000 $ 1,500,000 $ 3,000,900 $ 10,465,000 $ 3,662,750 $ 6,802,250 $ 3,000,900 $ 9,803,150 $ -855,000 $ 106000 40,280,000 $ 28,090,000 $ 1,500,000 $ 5,142,900 $ 12,190,000 $ 4,266,500$ 7,923,500 $ 5,142,900 $ 13,066,400$ -285,000 $ 111000 42,180,000 $ 29,415,000 $ 1,500,000 $ 3,672,900 $ 12,765,000 $ 4,467,750 $ 8,297,250 $ 3,672,900 $ 11,970,150 $ 370,500 $ 104500 39,710,000 $ 27,692,500 $ 1,500,000 $ 2,622,900 $ 12,017,500 $ 4,206,125$ 7,811,375$ 2,622,900 $ 10,434,275$ 1,339,500 $ $ 11,773,775$ 0.515788875 6,072,7825 81000 30,780,000 21,465,000 1,500,000 1,875,300 9,315,000 3,260,250 6,054,750 1,875,300 7,930,050 1,030,000 4,369,785 13,329,835 0.437109216) 5,826,594 $ $ -22,600,000 $ 1 S -22,600,000 $ 8,948,150 $ 0.847457627 7,583,178$ 12,781,400$ 0.71818443 9,179,402 $ 12,340,650 $ 0.608630873 7,510.901 S Net Sum of PV of Cashflow $ 13,572,857 Working Year Machinery Dep Rate as per 7 Year MACRS Dep Expense $ 1 21,000,000 $ 14.29% 3,000,900S 2 21,000,000 $ 24.49% 5,142,900 $ 3 21,000,000 $ 17.49% 3,672,900S 4 21,000,000 $ 12.49% 2,622,900S 5 21,000,000 8.93% 1,875,300 $ 0 4 Sales Unit Sales Price per unit Sale Value @380 Increamental Sale Working capital Invested Working capital Recovery 1 91000 380 $ 34,580,000 $ 5,700,000 $ -855,000 $ $ $ S -1,600,000 $ 2 106000 380S 40,280,000 $ 1,900,000 $ -285,000 $ 3 111000 380 $ 42,180,000 $ -2,470,000 $ 5 81000 380 30,780,000 104500 380 $ 39,710,000 S -8,930,000 $ 370.500S 1,339,500S 1,030,000 Salvage Value @20% of Cost Book Value after 5 Year * Loss on Selling Machine Tax Saving on loss Salvage value net of tax **100-14.29-24.49-17.49-12.49-8.9 $ $ $ $ $ 4,200,000 4,685,100=2100000*22.31% 485,100 169,785=485100*35% 4,369,785 22.31

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