ABC Music, Inc. projects following unit sales for new Bluetooth speakers: Year 7
ID: 2797320 • Letter: A
Question
ABC Music, Inc. projects following unit sales for new Bluetooth speakers: Year 7.Year Year Unit Sales Some to do's 1429% 2 24.49 3 17.49 4 12.49 8.93 8.92 8.93 4.46 Calculate Depreciation Expense for each year Build Pro Forma Income Statement for each year Determine OCF for each of the five years Initial investment (CAPEx & NWC) NWC reversal Determine Book Value after S years Calculate After Tax Salvage Value 86,500 106,000 3 118,000 4 109,000 591,000 Total fixed costs are $1,450,000 per year, variable production costs are $230 per unit, equipment needed to begin arn and the units are priced at $355 each. The production has an installed cost of $24,000,000. This equipment is industrial At the end of five years, this equipment can be sold for about 20 percent of its acquisition cost machinery and qualifiles as 33 percent marginal tax initial increase of $1,500,000 in net working capital. ABC is in the Production of the speakers will require an bracket and has a required return on all its projects of project, please answer 18 percent. Based on these preliminary project estimates for this five year A. B. C. What is the NPV of the project? What is the Profitability Index (PI)? What is the IRR? D. What is the Payback Period?Explanation / Answer
Answer A Calculation of NPV of the project Year 0 1 2 3 4 5 NPV Equipment Purchase -$24,000,000 Additional Net working Capital -$1,500,000 After tax operating cash flow $7,404,643 $9,845,608 $10,296,208 $9,146,458 $7,357,006 After Tax salvage value $4,994,040 Net Cash flow -$25,500,000 $7,404,643 $9,845,608 $10,296,208 $9,146,458 $12,351,046 Discount Factor @ 18% 1 0.84746 0.71818 0.60863 0.51579 0.43711 Present Values -$25,500,000 $6,275,121 $7,070,962 $6,266,590 $4,717,641 $5,398,756 $4,229,071 NPV of the project $4,229,071 Working Calculation of after tax operating cash flow Year 1 2 3 4 5 Sales in Units 86500 106000 118000 109000 91000 x Selling price per unit $355 $355 $355 $355 $355 Sales $30,707,500 $37,630,000 $41,890,000 $38,695,000 $32,305,000 Less : Variable cost $19,895,000 $24,380,000 $27,140,000 $25,070,000 $20,930,000 Less : Fixed Cost $1,450,000 $1,450,000 $1,450,000 $1,450,000 $1,450,000 Less : Depreciation $3,429,600 $5,877,600 $4,197,600 $2,997,600 $2,143,200 Profit before tax $5,932,900 $5,922,400 $9,102,400 $9,177,400 $7,781,800 Less : Tax @ 33% $1,957,857 $1,954,392 $3,003,792 $3,028,542 $2,567,994 Add : Depreciation $3,429,600 $5,877,600 $4,197,600 $2,997,600 $2,143,200 Operating Cash flow $7,404,643 $9,845,608 $10,296,208 $9,146,458 $7,357,006 Calculation of Depreciation using 7 Year MACRS property rates Year Installed Cost Depreciation rates Depreciation Accumulated depreciation 1 $24,000,000 14.29% $3,429,600 $3,429,600 2 $24,000,000 24.49% $5,877,600 $9,307,200 3 $24,000,000 17.49% $4,197,600 $13,504,800 4 $24,000,000 12.49% $2,997,600 $16,502,400 5 $24,000,000 8.93% $2,143,200 $18,645,600 6 $24,000,000 8.92% $2,140,800 $20,786,400 7 $24,000,000 8.93% $2,143,200 $22,929,600 8 $24,000,000 4.46% $1,070,400 $24,000,000 Book value of Installed equipment after 5 years = Installed cost - Accumulated depreciation in the year 5 = $24,000,000 - $18,645,600 = $53,54,400 Calculation of after tax salvage value of equipment at the end of 5th year Salvage value (20% * $24,000,000) $4,800,000 Less : Book value after 5 years $5,354,400 Loss on sale -$554,400 Less : Tax @ 35% -$194,040 After Tax salvage value $4,994,040 Answer B Profitability Index = Present value of Future cash inflow / Initial investment in project Profitability Index = $2,97,29,071 / $2,55,00,000 = 1.17 Answer C At IRR , the NPV of the project is zero. Year Cash flow 0 -$25,500,000 1 $7,404,643 2 $9,845,608 3 $10,296,208 4 $9,146,458 5 $12,351,046 IRR = 24.63% Answer D Calculation of payback period Year Cash flow Cumulative Cash flow 0 -$25,500,000 -$25,500,000 1 $7,404,643 -$18,095,357 2 $9,845,608 -$8,249,749 3 $10,296,208 $2,046,459 4 $9,146,458 $11,192,917 5 $12,351,046 $23,543,963 Payback period = 2 years + ($82,49,749/$1,02,96,208) = 2.80 years