1. AAI, Inc., forecasts unit sales for a potential new product as follows: Year Units of Output 95,000 107,000 110,000 The initial investment in Net Working Capital (NWC) is $1,500,000. At the end of the project, the investment in NWC is expected to be fully recovered. Total fixed costs are $1,750,000 each year, variable costs are $280 per unit, and the units are sold at $330 each. The new equipment is expected to cost S4,400,000 and will be depreciated using the 3-year MACRS depreciation schedules (relevant depreciation rates are 33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). At the end of three years the equipment can be sold for $100,000. If the new project is taken, there will be a negative effect on the firm's existing products - cash flow from the firm's existing products will decrease by 88,000 on a post-tax basis in years 1, 2, and 3. The tax rate s 40% and AAI Inc's cost ofcapital is 12% Compute the (i) payback period, (ii) NPV, (iii) IRR, and (iv) profitability index of the project.
1. AAI, Inc., forecasts unit sales for a potential new product as follows: Year Units of Output 95,000 107,000 110,000 The initial investment in Net Working Capital (NWC) is $1,500,000. At the end of the project, the investment in NWC is expected to be fully recovered. Total fixed costs are $1,750,000 each year, variable costs are $280 per unit, and the units are sold at $330 each. The new equipment is expected to cost S4,400,000 and will be depreciated using the 3-year MACRS depreciation schedules (relevant depreciation rates are 33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). At the end of three years the equipment can be sold for $100,000. If the new project is taken, there will be a negative effect on the firm's existing products - cash flow from the firm's existing products will decrease by 88,000 on a post-tax basis in years 1, 2, and 3. The tax rate s 40% and AAI Inc's cost ofcapital is 12% Compute the (i) payback period, (ii) NPV, (iii) IRR, and (iv) profitability index of the project.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 1BE: Average rate of return Determine the average rate of return for a project that is estimated to yield...
Related questions
Question
![1.
AAI, Inc., forecasts unit sales for a potential new product as follows:
Year Units of Output
95,000
107,000
110,000
The initial investment in Net Working Capital (NWC) is $1,500,000. At the end of the project, the
investment in NWC is expected to be fully recovered. Total fixed costs are $1,750,000 each year,
variable costs are $280 per unit, and the units are sold at $330 each. The new equipment is expected to
cost S4,400,000 and will be depreciated using the 3-year MACRS depreciation schedules (relevant
depreciation rates are 33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). At the end of
three years the equipment can be sold for $100,000. If the new project is taken, there will be a negative
effect on the firm's existing products - cash flow from the firm's existing products will decrease by
88,000 on a post-tax basis in years 1, 2, and 3. The tax rate s 40% and AAI Inc's cost ofcapital is 12%
Compute the (i) payback period, (ii) NPV, (iii) IRR, and (iv) profitability index of the project.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9529795e-c693-4558-b7b2-230ca0ea3e9c%2F00bb135c-a00b-4124-850a-7e4093d59f0b%2F5r8g5xn.png&w=3840&q=75)
Transcribed Image Text:1.
AAI, Inc., forecasts unit sales for a potential new product as follows:
Year Units of Output
95,000
107,000
110,000
The initial investment in Net Working Capital (NWC) is $1,500,000. At the end of the project, the
investment in NWC is expected to be fully recovered. Total fixed costs are $1,750,000 each year,
variable costs are $280 per unit, and the units are sold at $330 each. The new equipment is expected to
cost S4,400,000 and will be depreciated using the 3-year MACRS depreciation schedules (relevant
depreciation rates are 33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). At the end of
three years the equipment can be sold for $100,000. If the new project is taken, there will be a negative
effect on the firm's existing products - cash flow from the firm's existing products will decrease by
88,000 on a post-tax basis in years 1, 2, and 3. The tax rate s 40% and AAI Inc's cost ofcapital is 12%
Compute the (i) payback period, (ii) NPV, (iii) IRR, and (iv) profitability index of the project.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
![Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub