Question

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

  

Year Unit Sales

1 87,500   

2 105,000   

3 119,000   

4 108,000   

5 92,000   

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.

  

Answer 1

C D E F G H I 1 2 3 4 5 0 ($24,000,000) A B 1 Solution :- 2 Years 3 Initial Investment 4 Sales (Units) 5 Selling Price 6 Sales Value 7 Less :- VC @ $230 p.u 8 Less :- Fixed Cost 9 Less :- Dep 10 Income 11 Less :- Tax @35% 12 Income After Tax 13 Add :- Dep 14 Cash Flow 15 Working Capital 16 After tax Salvage Value 17 Net Cash flow 18 PVF @18% 19 PV 20 21 NPV = Sum of PV of Cashflows 22 87500 $355 $31,062,500 $20,125,000 $1,450,000 $3,429,600.00 $6,057,900.00 $2,120,265.00 $3,937,635.00 $3,429,600.00 $7,367,235.00 ($931,785) 105000 119000 108000 $355 $355 $355 $37,275,000 $42,245,000 $38,340,000 $24,150,000 $27,370,000 $24,840,000 $1,450,000 $1,450,000 $1,450,000 $5,877,600.00 $4,197,600.00 $2,997,600.00 $5,797,400.00 $9,227,400.00 $9,052,400.00 $2,029,090.00 $3,229,590.00 $3,168,340.00 $3,768,310.00 $5,997,810.00 $5,884,060.00 $5,877,600.00 $4,197,600.00 $2,997,600.00 $9,645,910.00 $10,195,410.00 $8,881,660.00 ($745,500) $585,750 $852,000 92000 $355 $32,660,000 $21,160,000 $1,450,000 $2,143,200.00 $7,906,800.00 $2,767,380.00 $5,139,420.00 $2,143,200.00 $7,282,620.00 $4,615,125 $4,994,040 $16,891,785 0.437 $7,383,555 ($1,500,000) ($25,500,000) 1.00 ($25,500,000) $6,435,450 0.847 $5,453,771 $8,900,410 0.718 $6,392,136 $10,781,160 0.609 $6,561,747 $9,733,660 0.516 $5,020,514 $5,311,722

Working Notes :-

J11 G H 1 Year 2 Machinery 3 Dep Rate 4 Dep Exps $24,000,000 14.29% $3,429,600.00 23 4 $24,000,000 $24,000,000 $24,000,000 24.49% 17.49% 12.49% $5,877,600.00 $4,197,600.00 $2,997,600.00 $24,000,000 8.93% $2,143,200.00 5 87500 $355 $31,062,500 $6,212,500 $931,875 105000 $355 $37,275,000 $4,970,000 $745,500 119000 108000 $355 $355 $42,245,000 $38,340,000 ($3,905,000) ($5,680,000) 92000 $355 $32,660,000 $0 ($585,750) ($852,000) $4,615,125 8 Sales (Units) 9 Selling Price 10 Sales Value 11 Increment in Sales 12 Working Capital Invested 13 Working Capital Recovery 14 15 Salvage Value 16 Book Value After Year 5 17 Loss on selling machine 18 Tax Saving On Machine Sale 19 After Tax Salvage value 20% * 24000000 22.31% * 24000000 $4,800,000 $5,354,400 $554,400 $194,040 $4,994,040 35%*554400 20 21