Aria Acoustics, Incorporated (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year12345Unit Sales73,40086,400105,50097,60067,500Production of the implants will require $1,600,000 in net working capital to start and additional net working capital investments eachyear equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $3,400,000 per year, variableproduction costs are $257 per unit, and the units are priced at $381 each. The equipment needed to begin production has an installedcost of $16,900,000. Because the implants are intended for professional singers, this equipment is considered industrial machineryand thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost.The tax rate is 22 percent and the required return is 14 percent. MACRS schedulea. What is the NPV of the project?Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.b. What is the IRR?Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.a. NPVb. IRR%

Capital budgeting refers to the method used for evaluating the viability of the project using…

Answered: Aria Acoustics, Incorporated (AAI),…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Aria Acoustics, Incorporated (AA), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 2 3 4 5 74,400 79,800 85,400 82,700 69,500 Production of the implants will require $1,480,000 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 $3,800,000 per year, variable production costs are $143 per unit, and the units are priced at $325 each. The equipment needed to begin production has an installed cost of $18,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 23 percent and the required return is 17 percent. (MACRS schedule) a. NPV b. IRR a. What is the NPV of the project? (Do not round intermediate…
Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 74,400 2 79,800 3 85,400 4 82,700 5 69,500 Production of the implants will require $1,480,000 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 $3,800,000 per year, variable production costs are $143 per unit, and the units are priced at $325 each. The equipment needed to begin production has an installed cost of $18,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 23 percent and the required return is 17 percent. (MACRS schedule) a. What is the NPV of the project? (Do…
Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 74,400 2345 79,800 85,400 82,700 69,500 Production of the implants will require $1,480,000 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 $3,800,000 per year, variable production costs are $143 per unit, and the units are priced at $325 each. The equipment needed to begin production has an installed cost of $18,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 23 percent and the required return is 17 percent. (MACRS schedule) a. What is the NPV of the project? (Do not round intermediate calculations and…
Aria Acoustics, Incorporated (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year 1244T 3 5 Unit Sales 76,400 89,400 109, 250 102, 100 69,000 Production of the implants will require $2,350,000 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 $4,900,000 per year, variable production costs are $272 per unit, and the units are priced at $426 each. The equipment needed to begin production has an installed cost of $19,900,000. 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 acquisition cost. The tax rate is 22 percent and the required return is 17 percent. MACRS schedule a. What is the NPV of the project? Note: Do not round intermediate…
Aday Acoustics, Inc., projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 73,800 2 79,200 3 84,600 4 82,100 5 68,700 Production of the implants will require $1,460,000 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 $3,700,000 per year, variable production costs are $141 per unit, and the units are priced at $323 each. The equipment needed to begin production has an installed cost of $18,300,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. The company is in the 21 percent marginal tax bracket and has a required return on all its projects of 15…
Aria Acoustics, Incorporated (AAL), projects unit sales for a new seven-octave voice emulation implant as follows: Year 1 2 3 4 5 Unit Sales 74, 000 87, 000 106, 250 98, 500 67, 800 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 15 percent of the projected sales increase for the following year. Total fixed costs are $3,700,000 per year, variable production costs are $260 per unit, and the units are priced at $390 each. The equipment needed to begin production has an installed cost of $17,500,000. 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 acquisition cost. The tax rate is 25 percent and the required return is 17 percent. MACRS schedule a. What is the NPV of the project? Note: Do not round intermediate…
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year 1 2 3 4 5 Unit Sales 100.000 125.000 135.000 145.000 95.000 Production of the implants will require $1,600,000 in net working capital to start and thereafter additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,100,000 per year, variable production costs are $270 per unit, and the units are priced at $400 each. The equipment needed to begin production has an installed cost of $32,000,000. This could be depreciated for tax purposes straight-line over 8 years. However, AAI expects to terminate the project at the end of five years and this equipment can be sold for about 40 percent of its acquisition cost. AAI is in the 25 percent marginal tax bracket and has a required return on all its projects of 10 percent. Based on these preliminary project estimates, what is the…
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 88,000 101,000 H 115,000 110,000 91,000 12345 Production of the implants will require $1,670,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,570,000 per year, variable production costs are $300 per unit, and the units are priced at $415 each. The equipment needed to begin production has an installed cost of $21,700,000. 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 15 percent of its acquisition cost. The tax rate is 22 percent and the required return on the project is 17 percent. Refer to Table 8.3. a. What is the NPV of the project? (Do not round intermediate…
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 86,000 2345 99,000 113,000 108,000 89,000 Production of the implants will require $1,650,000 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 $1,550,000 per year, variable production costs are $290 per unit, and the units are priced at $405 each. The equipment needed to begin production has an installed cost of $21,500,000. 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 25 percent of its acquisition cost. AAI is in the 34 percent marginal tax bracket and has a required return on all its projects of 19 percent. (MACRS schedule) What is the NPV of the project? (Do not…
Aguilera Acoustics, Inc. (AAI), projects unit sales for a newseven-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 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 the straight-line basis. In five years,…

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