Question

apter 10 Assignment Saved Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year un WN Unit Sales 74,400 87,400 106.750 99,100 68,000 Production of the implants will require $1,850,000 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 $3,900,000 per year, variable production costs are $262 per unit, and the units are priced at $396 each. The equipment needed to begin production has an installed cost of $17,900,000. 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 22 percent the required return is 13 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.) < Prev 15 of 20 Next > here to search

Answer 1

Please refer to the following screenshot showing the calculations of Cash flows from the given inputs & the next screenshot showing the resultant values for the cash flows & the NPV & IRR.

F 1 Inputs 2 New Equipment 17900000 3 4 5 Annual fixed costs 6 Variable costs (per unit) 7 Starting NOWC Unit sales price Salvage value Tax Rate (T) MARR 396 =15%*D2 0.22 0.13 3900000 262 1850000 10 Year: 11 New Equipment 12 additional NOWC needed 13 Required Level of NOWC --D2 =D7 =10%*(F15-E15) =D13+E12 10%*(G15-F15) =E13+F12 =10%*(H15-G15) =F13+G12 =10%*(115-H15) =G13+H12 =D7 =H13+112 14 15 Unit Sales 16 Sales Revenue (Unit sales x price per unit) 17 Annual fixed costs 18 Variable costs 19 Depriciation rate (7 year MACRS) 20 Depriciation 21 Total Operating costs EBIT (Operating Income) = Revenues - Operating costs 23 Taxes On Operating Income 24 Net Income =EBIT(1-T) os Operating Cash Flows (= Net Income + depriciation) 74400 =E$15*$G$3 =$D$5 =E15*$D$6 0.1429 =$D$2*E19 =E17+E18+E20 87400 =F$15*$G$3 =$D$5 F15*$D$6 0.2449 =$D$2*F19 =F17+F18+F20 106750 =G$15*$G$3 =$D$5 =G15*$D$6 0.1749 =$D$2*G19 =G17+G18+G20 99100 =H$15*$G$3 =$D$5 =H15*$D$6 0.1249 =$D$2*H19 =H17+H18+H20 68000 =I$15*$G$3 =$D$5 =115*$D$6 0.0893 =$D$2*119 =117+[18+120 =E16-E17-E18-E20 =E22*$G$5 =E22*(1-$G$5) =F16-F17-F18-F20 =F22*$G$5 =F22*(1-$G$5) =G16-G17-G18-G20 =G22*$G$5 =G22*(1-$G$5) =H16-H17-H18-H20 =H22*$G$5 =H22*(1-$G$5) =116-117-118-120 =122*$G$5 =122*(1-$G$5) =E24+E20 =F24+F20 =G24+G20 =H24+H20 =124+20 26 Terminal year salvage value of Equipment =G4 27 After Tax Salvage value (Salvage value- Remaining Book Value) < (1-T)) 28 NOWC recovery in terminal year 29 Project free cash flows 30 Present Value of Cash flows @MARR 31 32 NPV (Net Present Value) 33 IRR =(126-(D2-SUM(E20:120)))*(1-G5) =113 =111-112+114+25+127+128 =129/(1+$G$6)^110 =D11-D12+D14+D25+D27+D28 =D29/(1+$G$6)^D10 =E11-E12+E14+E25+E27+E28 =F11-F12+F14+F25+F27+F28 =E29/(1+$G$6) E10 =F29/(1+$G$6)^F10 =G11-G12+G14+G25+G27+G28 =H11-H12+H14+H25+H27+H28 =G29/(1+$G$6)^G10 =H29/(1+$G$6)^H10 =Sum of PV of cash flows =NPV(G6, E29:129)+D29 =IRR(D29:129,13%)

The following screenshot shows the resultant values of the above-given formulas:

1 Inputs 2 New Equipment 1,79,00,000 Unit sales price Salvage value Tax Rate (T) MARR 396.00 26,85,000 22% 13% 5 Annual fixed costs 6 Variable costs (per unit) 7 Starting NOWC 39,00,000 262.00 18,50,000 9 18,49,360.0 68000 2,69,28,000.0 39,00,000.0 1,78,16,000.0 8.93% 15,98,470.0 2,33,14,470.0 10 Year: O 11 New Equipment $ -1,79,00,000.0 12 additional NOWC needed $ 18,50,000.0 $ 1,300.0 $ 1,935.0 $ -765.0 $ -3,110.0 13 Required Level of NOWC $ 18,50,000.00 $ 18,51,300.0 $ 18,53,235.0 $ 18,52,470.0 $ 18,49,360.0 $ 14 15 Unit Sales 74400 87400 106750 99100 16 Sales Revenue (Unit sales x price per unit) $ 2,94,62,400.0 $ 3,46,10,400.0 $ 4,22,73,000.0 $ 3,92,43,600.0 $ 17 Annual fixed costs $ 39,00,000.0 $ 39,00,000.0 $ 39,00,000.0 $ 39,00,000.0 $ 18 Variable costs $ 1,94,92,800.0 $ 2,28,98,800.0 $ 2,79,68,500.0 $ 2,59,64,200.0 $ 19 Depriciation rate (7 year MACRS) 14.29% 24.49% 17.49% 12.49% 20 Depriciation $ 25,57,910.0 $ 43,83,710.0 $ 31,30,710.0 $ 22,35,710.0 $ 21 Total Operating costs $ 2,59,50,710.0 $ 3,11,82,510.0 $ 3,49,99,210.0 $ 3,20,99,910.0 $ EBIT (Operating Income) = $ 35,11,690.0 $ 34,27,890.0 $ 72,73,790.0 $ 71,43,690.0 $ 22 Revenues - Operating Costs 23 Taxes On Operating Income $ 7,72,571.8 $ 7,54,135.8 $ 16,00,233.8 $ 15,71,611.8 $ 24 Net Income =EBIT(1-T) $ 27,39,118.2 $ 26,73,754.2 $ 56,73,556.2 $ 55,72,078.2 $ Operating Cash Flows (Net 25 Income + depriciation) $ 52,97,028.2 $ 70,57,464.2 $ 88,04,266.2 $ 78,07,788.2 $ Terminal year salvage value of 26 Equipment $ After Tax Salvage value (Salvage value- Remaining Book Value) (1- 27 T)) $ 28 NOWC recovery in terminal year 29 Project free cash flows $ -1,97,50,000.0 $ 52,95,728.2 $ 70,55,529.2 $ 88,05,031.2 $ 78,10,898.2 $ 30 Present Value of Cash flows @MARR $ -1,97,50,000.0 $ 46,86,485.1 $ 55,25,514.3 $ 61,02,328.3 $ 47,90,570.1 $ 36,13,530.0 7,94,976.6 28,18,553.4 44,17,023.4 26,85,000.0 -10,20,622.2 18,49,360.0 52,45,761.2 28,47,189.0 $ 32 NPV (Net Present Value) 33 IRR 42,02,086.89 =Sum of PV of cash flows 21.19%

So the required values are:

NPV= $4,202,0686.89

IRR= 21.19%

If you have any doubt regarding any calculation step, please let me know in the comments