ABC Music, Inc. projects following unit sales for new Bluetooth speakers: Year 7
ID: 2797454 • 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
Capital Flow Cont p/u Units sold Fixed Cost EBD Depn EBT Tax PAT OCF FCF Disc rate PV 0 -2,40,00,000 -2,40,00,000 1.00000 -2,40,00,000 1 125 86,500 14,50,000 93,62,500 34,29,600 59,32,900 19,57,857 39,75,043 74,04,643 74,04,643 0.84746 62,75,121 2 125 1,06,000 14,50,000 1,18,00,000 58,77,600 59,22,400 19,54,392 39,68,008 98,45,608 98,45,608 0.71818 70,70,962 3 125 1,18,000 14,50,000 1,33,00,000 41,97,600 91,02,400 30,03,792 60,98,608 1,02,96,208 1,02,96,208 0.60863 62,66,590 4 125 1,09,000 14,50,000 1,21,75,000 29,97,600 91,77,400 30,28,542 61,48,858 91,46,458 91,46,458 0.51579 47,17,641 5 49,82,952 125 91,000 14,50,000 99,25,000 21,43,200 77,81,800 25,67,994 52,13,806 73,57,006 1,23,39,958 0.43711 53,93,909 NPV 57,24,224 NPV of the project is $5,724,224 Calculation of residual value after tax Residual value berfore tax 48,00,000 Less: Book Value -53,54,400 Loss on Sale of aasets -5,54,400 Tax saving at 33% 1,82,952 total inflow at the end of the project 49,82,952 Calculation of Depreciation 2,40,00,000 Recovery Year 7-Year Depn Book Value 1 14 34,29,600 2,05,70,400 2 24 58,77,600 1,46,92,800 3 17 41,97,600 1,04,95,200 4 12 29,97,600 74,97,600 5 9 21,43,200 53,54,400 B. Calculation of PI NPV/Initial outflow=(5724224+24000000)/24000000 1.24 C. Calculation of IRR 27% 28% Year FCF Disc rate Disc rate PV 27% PV-28% 0 -2,40,00,000 1.0000 1.0000 -2,40,00,000 -2,40,00,000 1 74,04,643 0.7874 0.7813 58,30,428 57,84,877 2 98,45,608 0.6200 0.6104 61,04,289 60,09,282 3 1,02,96,208 0.4882 0.4768 50,26,505 49,09,615 4 91,46,458 0.3844 0.3725 35,15,913 34,07,321 5 1,23,39,958 0.3027 0.2910 37,35,038 35,91,400 2,12,173 -2,97,504 IRR=27+212173/(212173+297504)*(28-27) IRR 27.42% d. Payback period Year FCF Cumulative FCF 0 -2,40,00,000 -2,40,00,000 1 74,04,643 -1,65,95,357 2 98,45,608 -67,49,749 3 1,02,96,208 35,46,459 4 91,46,458 1,26,92,917 5 1,23,39,958 2,50,32,875 Payback period=2+6749749/10296208 2.66 Years