Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 73,000 86,000 105,000 97,000 67,000 mo Production of the implants will require $1,500,000 in net working capital to start and additional networking capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $3,200,000 per year, variable production costs are $255 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of $16,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property (MACRS schedule). In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 21 percent tax and the required return is 18 percent. 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.) a. NPV b. IRR

Answer 1

cost of machine		16500000
year	0	1	2	3	4	5
cost of machine	-16500000
sales = units sold*selling price		27375000	32250000	39375000	36375000	25125000
less variable production cost = units sold*variable cost per unit		18615000	21930000	26775000	24735000	17085000
less fixed cost		3200000	3200000	3200000	3200000	3200000
less depreciation = cost of machine* Macrs rate		2357850	4040850	2885850	2060850	1473450
operating profit		3202150	3079150	6514150	6379150	3366550
less tax-21%		672451.5	646621.5	1367971.5	1339621.5	706975.5
after tax profit		2529698.5	2432528.5	5146178.5	5039528.5	2659574.5
add depreciation		2357850	4040850	2885850	2060850	1473450
net proceeds from disposal of machine						3380041.5
Investment in working capital	-1500000	-731250	-1068750	450000	1687500	1162500
net operating cash flow	-18000000	4156298.5	5404628.5	8482028.5	8787878.5	8675566
present value factor at 18% =1/(1+r)^n r =18%	1	0.847457627	0.71818443	0.608630873	0.515788875	0.4371092
present value of net operating cash flow = net operating cash flow*present value factor	-18000000	3522286.864	3881520.04	5162424.408	4532689.966	3792169.9
net present value =sum of present value of net operating cash flow	2891091.13
IRR =Using IRR function in MS excel	IRR(I3251:N3251)	23.98%
selling price of machine		3300000
book value of machine		3681150
loss on sale of machine		-381150
tax credit on loss on sale of machinary	381150*21%	-80041.5
net proceeds from disposal of machine	3300000+80041.5	3380041.5
cost of machine		16500000
accumulated depreciation		12818850
book value of machine		3681150
year	0	1	2	3	4	5
sales -units sold*selling price	0	27375000	32250000	39375000	36375000	25125000
projected sales increase		27375000	4875000	7125000	-3000000	-11250000
investment in working capital-15% of next year increased sale	-1500000	-731250	-1068750	450000	1687500	1162500
total investment in working capital	-1500000	-2231250	-3300000	-2850000	-1162500	0

C. - = AutoSum" AT A Eg Copy 2 Clear Sort & Find & Filter - Select Editing р a R s New Microsoft Office Excel Worksheet - Microsoft Excel Home Insert Page Layout Formulas Data Review View Cut Calibri - 11 - A A Dr Wrap Text Percentage 1 D 3 Paste Format Painter BI U A E E Merge & Center - $ % , ,00 Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment 0 Number Styles Cells J3255 foc =IRR(13251:N3251) F G N 3239 year 2 5 3240 cost of machine -16500000 3241 sales = units sold*selling price 27375000 32250000 39375000 36375000 25125000 3242 less variable production cost = units sold units sold 18615000 21930000 26775000 24735000| 17085000 3243 less fixed cost 3200000 3200000 3200000 3200000 3200000 3244 less depreciation = cost of machine* Mac 2357850 4040850 2885850 2060850 1473450 3245 operating profit 32021501 3079150 6514150 6379150 3366550 3246 less tax-21% 672451.5 646621.5 1367971.51 1339621.5 706975.5 3247 after tax profit 2529698.5 2432528.5 5146178.51 5039528.5 2659574.5 3248 add depreciation 2357850 4040850 2885850 2060850 1473450 3249 net proceeds from disposal of machine 3380041.5 3250 Investment in working -1500000 -731250 -1068750 450000 1687500 1162500 net operating cash fld -18000000 4156298.5 5404628.5 8482028.5 8787878.5 8675566 present value factor a 0.8474576271 0.71818443) 0.6086308731 0.515788875 0.4371092 3253 present value of neto -18000000 3522286.864 3881520.04| 5162424.408 4532689.966 3792169.9 3254 net present value =su 2891091.13 3255 IRR =Using IRR functio IRR(13251:N3251) 23.98% 3256 3257 3258 selling price of machine 3300000 3260 book value of machine 3681150 loss on sale of machine -381150 3262 tax credit on loss on s381150*21% -80041.5 3263 net proceeds from dis 3300000+80041.5 3380041.5 3251 3252 3259 3261