Sunday, July 29, 2007

Me thinks it's time to eat a bullet

With apologies to Jim Norton for the post title.

It is 2:20am, and I've been working on a single chapter of Finance homework for most of the day; I have three due at 11:59pm on Sunday. The entire day has been about 10 practice problems, and knowing that I have #10 completely fucked up, I emailed it off to my professor asking wtf I did wrong:

theAlphaJohn: ok this problem is driving me nuts. it makes no sense
Corey: try me
theAlphaJohn: Project Evaluation

Aguilera Acoustics (AAI), Inc., projects unit sales for a new 7-octave voice emulation implant as follows:

Year Unit Sales
1 105,400
2 121,520
3 131,440
4 141,360
5 115,320

Production of the implants will require $1,860,000 in net working capital to start and additional net working capital investments each year equal to 11 percent of the projected sales increase for the following year. Total fixed costs are $1,116,000 per year, variable production costs are $297 per unit, and the units are priced at $403 each. The equipment needed to begin production has an installed cost of $26,040,000.
theAlphaJohn: so NWC increases each year by 11% of the sales increase, which is the number of units * price (403$)
theAlphaJohn: in year four though, next year's sales are less, and in year five there is no next year
theAlphaJohn: so does NWC stay the same in 4 and 5 as 3? does NWC actually decrease (err increase since it's already an outflow)
theAlphaJohn: and the answer so far is none of the above b/c it doesnt get me the right answer
Corey: ouch...i'm glad i had beer cause my head would be hurting right now
Corey: that kind of computations at 1 am is not an easy thing
theAlphaJohn: i wonder if im going the wrong direction
theAlphaJohn: when sales go up, working capital goes down by 11% of the difference
Corey: yeah
theAlphaJohn: so initially it's -1,860,000
theAlphaJohn: then it's -1,860,000 - (48972650 - 42479200) * .11
theAlphaJohn: but in year 4 it flips over b/c sales decrease
theAlphaJohn: the book makes it look like that's fine, but then when i recover NWC the NPV becomes way, way too small
theAlphaJohn: which means the CF is Y5 is way overstated
theAlphaJohn: and then my brain leaks out my left ear
Corey: well i would first get some ear plugs
Corey: brain all over the desk could be a bit messy
theAlphaJohn: i understand the math, but what it means makes no sense
theAlphaJohn: in year one, you need to lay out 1.8 mil in working capital to get this going. then each year, you increase that by 11% in proportion to how much sales go up
theAlphaJohn: ..
theAlphaJohn: in year 4, when next years sales go down by 30,000 units, you recover 1.15 million dollars
theAlphaJohn: that makes no fucking sense
theAlphaJohn: you wouldnt need to put any more money out to accomodate sales, but you wouldn't get back almost as much as you laid out initially
Corey: hmm...this one seems to be hard without writing down all the calc. in front of me on paper to see the flow
theAlphaJohn: i want to do business in this imaginary world where a 20% drop in sales means a million bucks back in your pocket
Corey: hehehe that would be really nice
theAlphaJohn: it'd be baller
theAlphaJohn: fiddy and i would be racing our gallardos down the road
theAlphaJohn: cause when a huge drop in sales puts a mil in your pocket, daddy goes to lamborghini and buys himself a fresh ride

Homework Manager gives you all 10 practice problems in one group, but the graded assignment doles out problems in two parts. Before calling it a night, I decided to do the graded homework problems for Chapter 10 (even though I'd bomb the one) just so I felt like I accomplished something. Homework Managers allows you to retake the assignment up until it's due and only the highest grade counts.

I logged in and did Chapter 10 Part 1 and the first problem doesn't resemble any of the practice problems: I got 50%!

I have been doing practice problems, reading the book, working in Excel, all god-damned day for 50%?!?!

What kind of noise do you think a giraffe makes when you slit its throat from the bottom all the way up? Maybe I'll track down a tall ladder and run over to National Zoo tonight so I can find out.

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