Question

Aria Acoustics inc projects unit sales for a new seven octave voice emulation implant as follows: year 1 74,000 2 87,000 Aria Acoustics, Inc. (AA, projects unit sales for a new seven-octave voice emulation mplant as folows 74,000 87000 3 106 250 98,500 67.800 Production of the implants will require $1750,000 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 $3700000 per year variable production costs are $260 per unit, and the units are priced at $390 each. The equipment needed to begin production has an installed cost of $17,500,000. 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 20 percent of its acqusition cost. The tax rate is 25 percent the required return is 17 percent MACRS schedule a. What is the NPV of the project? (Do not r your answer to 2 decimal pleces, e.g. 32.16 b. What is the RA? (Do not round intermediate calculations and enter yor answer ." round intermediate celiculetions and round e percent rounded to 2 decimal pleces.. 32.16 Answer 1 of 1 Done Check my work mode: This shows what is correct or incorrect for the work you have com Production of the implants will require $1,750,000 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 $3.700,000 per year variable production costs are $260 per unit, and the units are priced at $390 each. The equipment needed to begin production has an installed cost of $17,500,000. 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 20 percent of its acquisition cost. The tax rate is 25 percent the required return is 17 percent MACRS schedule o. 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 o percent rounded to 2 decimal places, e.g., 32.16) 3 Answer is complete but not entirely correct. S 1 462 691 90 15030% a. NPV b. IRR Check my work mode : This shows whet is correct or incorrect for the work you have comp Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 74,000 87000 3 106.250 98,500 67,800 2 4 5 Production of the implants will require $1750.000 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 $3.700.000 per year variable production costs are $260 per unit, and the units are priced at S390 each. The equipment needed to begin production has an installed cost of $17.500.000 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 20 percent of its acquisition cost. The tax rate is 25 percent the required return is 17 percent. MACRS s o. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) Prev 9o9

Answer 1

	0	1	2	3	4	5
Sales in units		74000	87000	106250	98500	67800
Sales revenue (at $390/unit)		$ 2,88,60,000.00	$    3,39,30,000.00	$ 4,14,37,500.00	$      3,84,15,000.00	$   2,64,42,000.00
Variable cost (at $260/unit)		$ 1,92,40,000.00	$    2,26,20,000.00	$ 2,76,25,000.00	$      2,56,10,000.00	$   1,76,28,000.00
Fixed costs (other than depreciation)		$     37,00,000.00	$        37,00,000.00	$     37,00,000.00	$         37,00,000.00	$      37,00,000.00
Depreciation (7 Year MACRS) %		$                    14.29	$                      24.49	$                   17.49	$                        12.49	$                       8.93
Depreciation expense		$     25,00,750.00	$        42,85,750.00	$     30,60,750.00	$         21,85,750.00	$      15,62,750.00	$     1,35,95,750.00	$ 39,04,250.00
EBIT		$     34,19,250.00	$        33,24,250.00	$     70,51,750.00	$         69,19,250.00	$      35,51,250.00
Tax at 25%		$        8,54,812.50	$          8,31,062.50	$     17,62,937.50	$         17,29,812.50	$         8,87,812.50
NOPAT		$     25,64,437.50	$        24,93,187.50	$     52,88,812.50	$         51,89,437.50	$      26,63,437.50
Add: Depreciation		$     25,00,750.00	$        42,85,750.00	$     30,60,750.00	$         21,85,750.00	$      15,62,750.00
OCF		$     50,65,187.50	$        67,78,937.50	$     83,49,562.50	$         73,75,187.50	$      42,26,187.50
Capital expenditure	$     1,75,00,000.00
Change in NWC	$         17,50,000.00	$     40,22,000.00	$        10,14,000.00	$     15,01,500.00	$          -6,04,500.00	$     -23,94,600.00	$        52,88,400.00
Release of NWC						$      52,88,400.00
Salvage value = 17500000*20% =						$      35,00,000.00
Tax shield on loss = (3904250-3500000)*25% =						$         1,01,062.50
Project cash flows	$    -1,92,50,000.00	$     10,43,187.50	$        57,64,937.50	$     68,48,062.50	$         79,79,687.50	$   1,55,10,250.00
PVIF at 17% [PVIF = 1/1.17^n]	1	0.85470	0.73051	0.62437	0.53365	0.45611
PV at 17%	$    -1,92,50,000.00	$        8,91,613.25	$        42,11,364.96	$     42,75,728.59	$         42,58,360.62	$      70,74,398.00
NPV	$         14,61,465.43
IRR:
IRR is that discount rate for which NPV is 0. It is to be found out by trial and error.
PVIF at 20%	1	0.83333	0.69444	0.57870	0.48225	0.40188
PV at 20%	$    -1,92,50,000.00	$        8,69,322.92	$        40,03,428.82	$     39,62,999.13	$         38,48,228.93	$      62,33,221.61	$         -3,32,798.60
PVIF at 19%	1	0.84034	0.70616	0.59342	0.49867	0.41905
PV at 19%	$    -1,92,50,000.00	$        8,76,628.15	$        40,70,996.05	$     40,63,748.58	$         39,79,220.80	$      64,99,560.51	$           2,40,154.09
IRR = 19%+1%*240154/(240154+332799) =	19.42%