Question

Problem 10-36 Project Evaluation (LO1) Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year 10 points Unit Sales 73,800 86,800 106,000 98,200 67,700 8 02:17:26 Mtu Production of the implants will require $1,700,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $3,600,000 per year, variable production costs are $259 per unit, and the units are priced at $387 each. The equipment needed to begin production has an installed cost of $17,300,000. 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 15 percent of its acquisition cost. The tax rate is 24 percent the required return is 16 percent. MACRS schedule a. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the IRR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) NPV b. IRR

Please show the steps and which answer is NPV and IRR Thank you!

Answer 1

fox IRR (M2:M7) M9 A В D E F G H K M Depreciatio Operating cash flows Change in Capital spending (1,700,000)(17,300,000) (503,100) (743,040) Total cash Contributio PVIF@ Fixed costs Depreciation 1 Year Sale units n per unit Tax@24% PAT flows (19,000,000) 1.000 $ 4,533,485 0.862 $ 5,981,689 0.743 $ 8,603,725 0.641 $ 8,515,831 0.552 $ 8,583,071 0.476 $ 16% Present value PBT NWC (19,000,000.00) 0 73,800 $ 86,800 $ 106,000 $ 98,200 $ 67,700 $ 128 $3,600,000 2,472,170 $3,374,230 $ 809,815$2,564,415 $2,472,170$5,036,585 128 $3,600,000 4,236,770 $3,273,630 $ 785,671$2,487,959 $4,236,770$ 6,724,729 128 $3,600,000 3,025,770 $6,942,230 $1,666,135 $5,276,095 $3,025,770 $8,301,865 128 $3,600,000 2,160,77o $6,808,830 $1,634,119$5,174,711 $2,160,770$7,335,481 128 $3,600,000 $1,544,890 $3,520,710 $ 844,970$2,675,740 $1,544,890 $4,220,630 3,908,176.55 1 2 4,445,369.20 5,512,042.31 3 301,860 1,180,350 4 4,703,217.54 5 1,463,930 2,898,511 4,086,511.72 23.07% IRR Net present value $3,655,317.33 Asset cost $17,300,000 Less: Depreciation charged $13,440,370 $3,859,630 $ 2,595,000 $-1,264,630 $ -303,511 $ 2,898,511 WDV of machine at the time of sale Sale value of machine Profit/(Loss) on sale Less:Tax@24% After tax salvage value

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