FIN 302 Lecture 12: Chapter10.1

FIN 302 Lecture 12: Chapter10.1

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Net cash flow = operating cf generated by project. Net cash flow = ocf ncs nwc: ocf -> operating cash flow, ncs -> net capital spending, nwc -> change in net working capital. Nwc = nwc at end nwc at beginning. = ca end cl end ca begin + cl begin. Only count all incremental cash flow: no opportunity cost, no sunk cost, no count complementing. Do not count cost of financing: dividends, interest or principal payment, since there are not cash flow from assets. Ocf = s- c tc x (s c d: bottom up approach. Ocf = [(s c d) x (1 tc)] + d. Ocf = net income + d: tax shield approach. Ocf = s- c tc x (s c d) Ocf = [(s-c) x (1-tc)] + (tc x d) Ncs we need to know: everything expect depreciation and sunk costs, since depreciation is non-cash deduction.

Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:

Year Unit Sales

1 112,500

2 131,500

3 119,500

4 102,500

5 88,500

Production of the implants will require $1,770,000 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 $1,440,000 per year, variable production costs are $234 per unit, and the units are priced at $354 each. The equipment needed to begin production has an installed cost of $27,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS (MACRS Table) property. In five years, this equipment can be sold for about 10 percent of its acquisition cost. AAI is in the 34 percent marginal tax bracket and has a required return on all its projects of 17 percent.

Required: What are operating cash flows, change in net working capital, capital spending, and total cash flow for each year of the project? (Do not round intermediate calculations. Enter a minus sign to indicate a cash outflow. Enter a zero where required. Round your answer to the nearest whole number (e.g., 32)

Year 0 1 2 3 4 5

OCF $

Change in NWC

Capital spending

Total cash flow

What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Net present value $

What is the IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Internal rate of return %

Aguilera Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:

Year	Unit Sales
1	111,000
2	130,000
3	118,000
4	101,000
5	87,000

Production of the implants will require $2,400,000 in net working capital to start and additional net working capital investments each year equal to 25 percent of the projected sales increase for the following year. Total fixed costs are $1,410,000 per year, variable production costs are $231 per unit, and the units are priced at $351 each. The equipment needed to begin production has an installed cost of $26,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS (MACRS Table) property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 40 percent marginal tax bracket and has a required return on all its projects of 16 percent.

Required:

What are operating cash flows, change in net working capital, capital spending, and total cash flow for each year of the project? (Do not round intermediate calculations. Enter a minus sign to indicate a cash outflow. Enter a zero where required. Round your answer to the nearest whole number (e.g., 32)

What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Net present value

What is the IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Internal rate of return

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sugar land company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a mba student. the production line would be set up in unused space (market value of zero) in sugar landâ main plant. total cost of the machine is $190,000. the machinery has an economic life of 4 years, and macrs will be used for depreciation. the machine will have a salvage value of 30,000 after 4 years. the new line will generate sales of 1,300 units per year for 4 years and the variable cost per unit is $100 in the first year. each unit can be sold for $200 in the first year. the sales price and variable cost are expected to increase by 3% per year due to inflation. further, to handle the new line, the firmâs net working capital would have to increase by $30,000 at time zero (the nwc will be recouped in year 4). the firmâs tax rate is 40% and its weighted average cost of capital is 10%. a. what are the annual depreciation expenses for years 1 through 4? (10 points) year 1 year 2 year 3 year4 depreciation b. calculate the annual sales revenues and costs (other than depreciation), years 1 through 4. (15 points) year 1 year 2 year 3 year4 $ sales $ variable costs c. estimate annual (year 1 through 4) operating cash flows (25 points) year 1 year 2 year 3 year4 sales ocf d. estimate the after tax salvage cash flow (5 points) e. estimate the cash flow of this project (25 points) year zero year 1 year 2 year 3 year4 cf of the project f. estimate the npv, irr, mirr, and profitability index of the project. (20 points) npv = irr = mirr = pi

taupespider459

Change in NWC

Capital spending

Total cash flow