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...

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