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Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
|
Year |
Unit Sales |
|
1 |
8300 |
|
2 |
9200 |
|
3 |
10400 |
|
4 |
9800 |
|
5 |
8400 |
Production of the implants will require GH¢ 150,000 in net working capital to start and additional networking capital investments each year equal to 15 percent of the projected sales for that year. In the final year of the project, networking capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life. Total fixed costs are GH¢ 240,000 per year, variable production costs are GH¢ 190 per unit, and the units are priced at GH¢ 345 each. The equipment needed to begin production has an installed cost of GH¢ 2,300,000. Because the implants are intended for professional singers, this equipment depreciated using a straight-line basis. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The cost of acquisition and installation is to be financed partly by a loan from Swez Bank to the tune of GH¢ 1,000,000 at an interest rate of 15% and the remaining financed from the internal resource of the firm. The cost of equity is 20%. AAI is in the 25 percent marginal tax bracket. Based on these preliminary project estimates,
Required
Advise whether the company should buy the equipment or not using the NPV
Solutions
Expert Solution
| WACC | |||||||
| Total | Weight | Weight | Cost | Cost | Weight * Cost | ||
| Debt | 1,000,000 | 1000000/2300000 | 43.48% | 15%*(1-25%) | 11.25% | 4.89% | |
| Equity | 1,300,000 | 1300000/2300000 | 56.52% | 20.00% | 20.00% | 11.30% | |
| Total | 2,300,000 | WACC | 16.20% | ||||
| Tax rate | 25% | ||||||
| Calculation of annual depreciation | |||||||
| Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Total | |
| Depreciable cost (2300000*80%) | $ 1,840,000 | $ 1,840,000 | $ 1,840,000 | $ 1,840,000 | $ 1,840,000 | ||
| Dep Rate | 20.00% | 20.00% | 20.00% | 20.00% | 20.00% | ||
| Depreciation | Cost * Dep rate | $ 368,000 | $ 368,000 | $ 368,000 | $ 368,000 | $ 368,000 | $ 1,840,000 |
| Calculation of after-tax salvage value | |||||||
| Cost of machine | $ 2,300,000 | ||||||
| Depreciation | $ 1,840,000 | ||||||
| WDV | Cost less accumulated depreciation | $ 460,000 | |||||
| Sale price | $ 460,000 | ||||||
| Profit/(Loss) | Sale price less WDV | $ - | |||||
| Tax | Profit/(Loss)*tax rate | $ - | |||||
| Sale price after-tax | Sale price less tax | $ 460,000 | |||||
| Calculation of annual operating cash flow | |||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | |||
| No of units | 8,300 | 9,200 | 10,400 | 9,800 | 8,400 | ||
| Selling price | $ 345 | $ 345 | $ 345 | $ 345 | $ 345 | ||
| Operating ost | $ 190 | $ 190 | $ 190 | $ 190 | $ 190 | ||
| Sale | $ 2,863,500 | $ 3,174,000 | $ 3,588,000 | $ 3,381,000 | $ 2,898,000 | ||
| Less: Operating Cost | $ 1,577,000 | $ 1,748,000 | $ 1,976,000 | $ 1,862,000 | $ 1,596,000 | ||
| Contribution | $ 1,286,500 | $ 1,426,000 | $ 1,612,000 | $ 1,519,000 | $ 1,302,000 | ||
| Less: Fixed cost | $ 240,000 | $ 240,000 | $ 240,000 | $ 240,000 | $ 240,000 | ||
| Less: Depreciation | $ 368,000 | $ 368,000 | $ 368,000 | $ 368,000 | $ 368,000 | ||
| Profit before tax (PBT) | $ 678,500 | $ 818,000 | $ 1,004,000 | $ 911,000 | $ 694,000 | ||
| Tax@25% | PBT*Tax rate | $ 169,625 | $ 204,500 | $ 251,000 | $ 227,750 | $ 173,500 | |
| Profit After Tax (PAT) | PBT - Tax | $ 508,875 | $ 613,500 | $ 753,000 | $ 683,250 | $ 520,500 | |
| Add Depreciation | PAT + Dep | $ 368,000 | $ 368,000 | $ 368,000 | $ 368,000 | $ 368,000 | |
| Cash Profit after-tax | $ 876,875 | $ 981,500 | $ 1,121,000 | $ 1,051,250 | $ 888,500 | ||
| Calculation of working capital movement | |||||||
| Working capital-opening | $ - | $ 150,000 | $ 429,525 | $ 476,100 | $ 538,200 | $ 507,150 | |
| Closing working capital | $ 150,000 | $ 429,525 | $ 476,100 | $ 538,200 | $ 507,150 | $ - | |
| Movement | $ 150,000 | $ 279,525 | $ 46,575 | $ 62,100 | $ (31,050) | $ (507,150) | |
| Calculation of NPV | |||||||
| 16.20% | |||||||
| Year | Capital | Working capital | Operating cash | Annual Cash flow | PV factor, 1/(1+r)^time | Present values | |
 jeff jeffy answered 1 year agoRelated SolutionsAguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...Aguilera Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
Year
Unit Sales
1
91,000
2
106,000
3
111,000
4
104,500
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...
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...Aguilera Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
Year
Unit Sales
1
8300
2
9200
3
10400
4
9800
5
8400
Production of the implants will require GH¢ 150,000 in net
working capital to start and additional net working capital
investments each year equal to 15 percent of the projected sales
for that year. In the final year of the project, net working
capital will decline to zero as the project is...
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...Aguilera Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
Year Unit
Sales
1 9
2 10
3 12
4 13
5 8
Working capital requirements: For each year, the total
investment in net working capital will equal 10% of the dollar
value of sales of the next year. All working capital is liquidated
at the termination of the project at the end of year 5.
Total fixed costs are $12 per year, variable production costs
are $20 per unit,...
Question 1 Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant...Question 1
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
Year
Unit Sales
1
8300
2
9200
3
10400
4
9800
5
8400
Production of the implants will require GH¢ 150,000 in net
working capital to start and additional net working capital
investments each year equal to 15 percent of the projected sales
for that year. In the final year of the project, net working
capital will decline to zero as the...
Project Evaluation. Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant...Project Evaluation. 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...
Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:...Aria 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...
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...
Aria Acoustics,
Inc. (AAI), projects unit sales for a new seven-octave voice
emulation implant as follows:
Year
Unit Sales
1
73,000
2
86,000
3
105,000
4
97,000
5
67,000
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 $3,200,000 per year, variable
production costs are $255 per unit, and the units...
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...
Aria Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
Year
Unit Sales
1
90,000
2
103,000
3
117,000
4
112,000
5
93,000
Production of the implants will require $1,690,000 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 $1,590,000
per year, variable production costs are $310 per unit, and the
units...
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...Aria Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
YEAR
UNIT SALES
1
80,000
2
97,000
3
109,000
4
103,000
5
78,000
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 $1,900,000
per year, variable production costs are $195 per unit, and the
units...
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:...Aria Acoustics, Inc. (AAI), projects unit sales for a new
seven-octave voice emulation implant as follows:
▪ The company has spent $150,000 for a marketing study to
evaluate the project. The study shows that the company will sell
75,000 units per year for 6 years. In addition, the company will
lose sales of 12,000 units per year of its high priced voice
emulation implant.
▪ The variable production costs for new voice emulation implant
are $260 per unit, and the...
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