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 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, 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
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 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, 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
Required
Advise whether the company should buy the equipment or not using the
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