Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 6, Problem 32QAP
Summary Introduction
Adequate information:
| Year | Unit Sales |
| 1 | 73,000 |
| 2 | 79,000 |
| 3 | 84,000 |
| 4 | 82,000 |
| 5 | 68,000 |
Initial net working capital (NWC) = $1,500,000
Additional net working capital for Year 1 to Year 4 will be 15% of the projected sales increase in the following year.
Total fixed costs = $3,400,000
Variable cost per unit = $145
Price per unit = $325
Cost of equipment (C) = $18,500,000
Market value = 20% of acquisition cost
Tax rate = 23% or 0.23
Required
To compute: The
Introduction:
Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net
Net present value (NPV) is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of
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Aday Acoustics, Inc., projects unit sales for a new 7-octave voice emulation implant as follows:
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1
73,800
2
79,200
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84,600
4
82,100
5
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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 (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 (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…
Chapter 6 Solutions
Corporate Finance
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Prob. 1QAPCh. 6 - Prob. 2QAPCh. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QAPCh. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Prob. 7QAPCh. 6 - Prob. 8QAPCh. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Calculating Salvage Value An asset used in a...Ch. 6 - Calculating NPV Thurston Petroleum is considering...Ch. 6 - Prob. 12QAPCh. 6 - Cost-Cutting Proposals Starset Machine Shop is...Ch. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Prob. 15QAPCh. 6 - Prob. 16QAPCh. 6 - NPV and Bonus Depreciation Eggz, Inc., is...Ch. 6 - Prob. 18QAPCh. 6 - Prob. 19QAPCh. 6 - Prob. 20QAPCh. 6 - Prob. 21QAPCh. 6 - Prob. 22QAPCh. 6 - Prob. 23QAPCh. 6 - Prob. 24QAPCh. 6 - Prob. 25QAPCh. 6 - Prob. 26QAPCh. 6 - Prob. 27QAPCh. 6 - Prob. 28QAPCh. 6 - Prob. 29QAPCh. 6 - Prob. 30QAPCh. 6 - Prob. 31QAPCh. 6 - Prob. 32QAPCh. 6 - Prob. 33QAPCh. 6 - Prob. 34QAPCh. 6 - Prob. 35QAPCh. 6 - Prob. 36QAPCh. 6 - Prob. 37QAPCh. 6 - Prob. 38QAPCh. 6 - Prob. 39QAPCh. 6 - Prob. 40QAPCh. 6 - Prob. 41QAPCh. 6 - Prob. 42QAPCh. 6 - Prob. 1MCCh. 6 - GOODWEEK TIRES, INC. After extensive research and...
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