Ernie's Echos, Inc

Subject:FinancePrice: Bought3

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Ernie's Echos, Inc. (EEI), projects unit sales for a new six-octave voice emulation implant as follows:

 

Year Unit Sales

1 110,000

2 127,000

3 115,000

4  98,000

5  92,000

6  75,000

 

Total ?xed costs are $1,850,000 per year, variable production costs are $315 per unit, and the units are priced at $455 each. The equipment needed to begin production has an installed cost of $27,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus quali?es as seven-year MACRS property. EEI is in the 22 percent marginal tax bracket. Construct the proforma income statement to compute net income and operating cash flow. Only compute these items.

 

Part 2

 

First, production of the implants will require $2,500,000 in networking capital to start and additional networking capital investments each year equal to 15 percent of the projected sales revenue increase for the following year. That is, the additional NWC in year 1 will be .15×(Revenue in year 2 - Revenue in year 1). In the final year of the project, EEI will recoup all of its NWC. Consider the following example. When someone opens a kiosk in the mall to sell Christmas ornaments from October 1 to January 31, that person has to make an investment in NWC, most notably an inventory of ornaments. Once January 31 comes, we assume that all the ornaments are sold and the person gets back their working capital.

 

Also, assume that the equipment will be sold for 20% of its acquisition cost in year 6 and that the cost of capital is 18%. Compute the following:

 

a.     Payback period

b.     Profitability index

c.      Net present value

d.     Internal rate of return