Problem 6-18 Cash Flow Valuation Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash…

Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year in perpetuity. The appropriate real discount rate for Phillips is 11 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from Phillips’s operations? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Present value

$ [removed]

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $270,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $105,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $30,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent. Sanders has other ongoing profitable operations.

Calculate the NPV of the project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$ [removed]

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

Year

Unit Sales

1

83,000

2

92,000

3

104,000

4

98,000

5

84,000

Production of the implants will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $2,400,000 per year, variable production costs are $190 per unit, and the units are priced at $345 each. The equipment needed to begin production has an installed cost of $23,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. MACRS schedule.

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

NPV

$ [removed]

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

IRR

[removed]

%