Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 74,600 87,600 107.000 99,400 68,100 Production of the implants will require $1,900,000 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 $4,000,000 per year, variable production costs are $263 per unit, and the units are priced at $399 each. The equipment needed to begin production has an installed cost of $18,100,000. 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. The tax rate is 23 percent the required return is 14 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

Answer 1

fix =IRR(M2:M7) D E F Fixed costs Depreciation PBT M9 : X V A B C Contributio 1 Year Sale units n per unit 2 3 1 74,600 $ 136 4 2 87,600 $ 136 5 3 107,000 $ 136 6 4 99,400 $ 136 5 68,100 $ 136 $4,000,000 $ 2,586,490 $3,559,110 $4,000,000 $ 4,432,690 $3,480,910 $4,000,000 $ 3,165,690 $7,386,310 $4,000,000 $ 2,260,690 $7,257,710 $4,000,000 $ 1,616,330 $3,645,270 G H I J K L M N o Depreciatio Operating Change in Capital Total cash PVIF@ Tax@23% PAT cash flows NWC spending flows 14% Present value (1,900,000) (18,100,000) (20,000,000)| 1.000 $ (20,000,000.00) $ 818,595 $2,740,515 $2,586,490 $5,327,005 (778,050) 4,548,955 0.877 $ 3,990,311.14 $ 800,609 $2,680,301 $4,432,690 $ 7,112,991 (1,161,090) 5,951,901 0.769 $ 4,579,794.32 $ 1,698,851 $5,687,459 $3,165,690 $ 8,853,149 454,860 9,308,009 0.675 $ 6,282,640.75 $ 1,669,273 $5,588,437 $ 2,260,690 $ 7,849,127 1,873,305 9,722,432 0.592 $ 5,756,460.06 $ 838,412 $2,806,858 $1,616,330 $ 4,423,188 1,510,975 3,716,165 9,650,328 0.519 $ 5,012,078.07 IRR 23.64% Net present value $ 5,621,284.33 14 Asset cost Less: Depreciation charged WDV of machine at the time of sale Sale value of machine Profit/(Loss) on sale Less:Tax@23% After tax salvage value $ 18,100,000 $ 14,061,890 $ 4,038,110 $ 3,620,000 $ -418,110 $ -96,165 $ 3,716,165 18

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