Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 75,000 2 88,000 3 107,500 4 100,000 5 68,300 Production of the implants will require $2,000,000 in net working capital to start and additional networking capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $4,200,000 per year, variable production costs are $265 per unit, and the units are priced at $405 each. The equipment needed to begin production has an installed cost of $18,500,000. 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 25 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?

Answer 1

M9 : x 3x =IRR(M2:M7) D O + A B C Contributio 1 Year Sale units In per unit 20 3 1 75,000 $ 140 4 2 88,000 $ 140 5 3 107,500 $ 140 6 4 100,000 $ 140 7 5 68,300 $ 140 nm too E F G H I J K L M N Depreciatio Operating Change in Capital Total cash PVIF@ Fixed costs Depreciation PBT Tax@25% PAT In cash flows NWC spending flows 16% Present value (2,000,000)| (18,500,000) (20,500,000) 1.000 $ (20,500,000.00) $4,200,000 $ 2,643,650 $3,656,350 $ 914,088 $2,742,263 $2,643,650 $5,385,913 (526,500) 4,859,413 0.862 $ 4,189,148.71 $4,200,000 $ 4,530,650 $3,589,350 $ 897,338 $2,692,013 $4,530,650 $ 7,222,663 (789,750) 6,432,913 0.743 $ 4,780,701.92 $4,200,000 $ 3,235,650 $7,614,350 $ 1,903,588 $5,710,763 $3,235,650 $ 8,946,413 303,750 9,250,163 0.641 $ 5,926,187.59 $4,200,000 $ 2,310,650 $7,489,350 $ 1,872,338 $5,617,013 $2,310,650 $ 7,927,663 1,283,850 9,211,513 0.552 $ 5,087,436.35 $4,200,000 $ 1,652,050 $3,709,950 $ 927,488 $2,782,463 $1,652,050 $ 4,434,513 1,728,650 3,113,088 9,276,250 0.476 $ 4,416,543.36 1650 |$ 7,927.663 ,288,650 31130 IRR 22.99% Net present value $ 3,900,017.92 16 Asset cost Less: Depreciation charged WDV of machine at the time of sale Sale value of machine Profit/(Loss) on sale Less:Tax@25% After tax salvage value $ 18,500,000 $ 14,372,650 $ 4,127,350 $ 2,775,000 $ -1,352,350 $ -338,088 $ 3,113,088 17 19

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