I've solved every problem in my assignment except for two. I only need one more to get the grade I'd like/need. I've been doing this one over and over, consistently getting wrong answers. I know the process of how to do it generally, but I feel I make mistakes in calculating either depreciation or changes in net working capital. Here's the problem:
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales
1 74,800
2 86,240
3 93,280
4 100,320
5 81,840
Production of the implants will require $1,320,000 in net working capital to start and additional net working capital investments each year equal to 19 percent of the projected sales increase for the following year. Total fixed costs are $792,000 per year, variable production costs are $211 per unit, and the units are priced at $286 each.
The equipment needed to begin production has an installed cost of $18,480,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property (MACRS Table). In five years, this equipment can be sold for about 17 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 17 percent.
What is the NPV of the project?
What is the IRR of the project?
Thanks for any and all help!
To calculate the NPV (Net Present Value) and IRR (Internal Rate of Return) of the project, you need to follow these steps:
Step 1: Determine the cash flows.
In order to calculate the NPV and IRR, you need to first determine the cash flows for each year of the project. Cash flows consist of the inflows (revenues) and outflows (costs and investments) that occur during each year.
In this problem, the cash flows consist of the revenues from unit sales, variable production costs, fixed costs, net working capital investments, and the salvage value of the equipment.
Step 2: Calculate the net cash flows.
Net cash flows are calculated by subtracting the cash outflows from the cash inflows for each year. This gives you the amount of cash that will be generated or consumed by the project in each year.
Step 3: Calculate the present value of cash flows.
To calculate the NPV, you need to determine the present value of each year's net cash flow. The present value is a way to account for the time value of money, representing the current value of future cash flows.
Step 4: Calculate the NPV.
The NPV is calculated by summing up the present values of all the cash flows and subtracting the initial investment cost.
Step 5: Calculate the IRR.
The IRR is the discount rate that makes the NPV of the project equal to zero. It is the rate at which the present value of the cash inflows equals the present value of the cash outflows.
To calculate the NPV and IRR for the given problem, you can follow these steps using a spreadsheet or financial calculator. Alternatively, you can use specialized financial software or online tools that offer NPV and IRR calculations.
However, since this problem involves multiple variables and calculations, it is recommended to use a spreadsheet such as Microsoft Excel or Google Sheets to streamline the process.
You can use the following steps in Excel or Google Sheets to calculate the NPV and IRR:
Step 1: Enter the years and unit sales data in columns A and B. (Years in column A, Unit Sales in column B)
Step 2: Calculate the revenues in column C by multiplying unit sales with the unit price (given as $286).
Step 3: Calculate the variable production costs in column D by multiplying the unit sales with the variable production cost (given as $211).
Step 4: Calculate the net working capital investments in column E. The initial investment is given as $1,320,000, and each subsequent year's investment is 19% of the projected sales increase for the following year.
Step 5: Calculate the fixed costs in column F. The fixed costs are given as $792,000 per year.
Step 6: Calculate the total cash outflows in column G by summing the variable production costs, net working capital investments, and fixed costs.
Step 7: Calculate the cash inflows in column H by subtracting the total cash outflows from the revenues.
Step 8: Calculate the present value of cash flows in column I using the NPV formula. The formula is "=NPV(Discount Rate, Your Cash Flow Range)". The cash flow range is the range that contains the cash inflows and outflows for each year.
Step 9: Calculate the NPV by summing up the present values in column I and adding the salvage value of the equipment in year 5.
Step 10: Calculate the IRR using the IRR formula. The formula is "=IRR(Your Cash Flow Range)". The cash flow range is the range that contains the cash inflows and outflows for each year.
By performing these steps, you should be able to calculate the NPV and IRR of the project. Good luck!