Question

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 2 87,000 3106.250 98,500 67,800 4 5 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 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 sche o. What is the NPV of the project? (Do not round intermediate colculations and round your answer to 2 decimal places, e.g.. 32.16.) Prey9o9 E 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 15.0301% a. NPV b. IRR

Answer 1

Year-5 Year-o Year-4 Year-1 Year-2 Year-3 67,800(a) Number of units sold 74,000 87,000 106,250 98,500 $28,860,000 $33,930,000 $41,437,500$38,415,000 $26,442,000>(a) x $390 $3,700,000$3,700,0003,700,000-$3,700,000$3,700,000 [Given] $19,240,000$22,620,000-$27,625,000-$25,610,00017,628,000->(a) x $260 $2,500,750-$4,285,7503,060,750$2,185,750$1,562,750 [Ref: MACRS table] 3,419,250$3,324,250$7,051,750$6,919,2503,551,250-(b) 854,813831,063 -$1,762,938-$1,729,813 $2,564,438 $2,493,188$5,288,813$5,189,438 $2,663,438 $2,500,750 S4,285,750 3,060,70 $2,185,750 $1,562,750 Non-cash expense and so added back] 5,065,188 $6,778,938$8,349,563 $7,375,188$4,226,188 Sales Revenue Less: Fixed cossts excluding dep. Less: Variable production cost Less: Depreciation Expense Before-tax income Less: Taxes @ 25% $887,813|») (a) x 25% After-tax net profit/ (loss) Add back dep. (Non-cash expense ting Cash Flows Annual $17,500,000 Initial investment $1,750,000$760,500 $1,126,125 $453,375 $1,795,950 [Change in sales x 15%) Working capa investment After-tax salvage value 3,601,063 [Ref: Workings] $1,387,300 ISum of working capital investments from year-0 thru 4] $4,988,363 Working capital r Terminal cash flow $19,250,000$4,304,688$5,652,813 $8,802,938$9,171,138$9,214,550 1.000000| 0.854701| 0.730514| 0.624371| 0.533650| 0456111|[1/(1+17%二1/(1+17%):1/(1+17%"; 1/(1+17%"; 1/(1+17%), 1/(1+17%,- $19,250,000 $3,679,220.09 $4,129,456.13 $5,496,294.99 $4,894,177.97 $4,202,859.02 Total annual after-tax CFs (1) PV Factor @ 17% Present Value

$3,152,008.19 [Sum of present value from year-0 thru 5] a) Net Present Value (NPV) b) Internal Rate of Return (IRR) 22.99% [calculated using EXCEL FUNCTION IRRO using total annual after-tax CFs as values] WORKINGS: 7-year MACRS Table 17,500,000 $13,595,750 [Ref: MACRS Table] Initial investment Less: Depreciation till year-5 Annual Dep $3,904,250 [S13595750 $17500000] Book value at the end of 5 years Year Cost De 14.29% $17,500,000 $2,500,750 $3,500,000 [$17500000 x 2096] Salvage value at the end of 5 yrs 24.49% $17,500,000 $17,500,000 $4,285,750 $3,000,750 $404,250 [S3500000- $3904250] 2 Loss on disposal in year-5 17.49% 25% Tax Rate 12.49% $17,500,000 $2,185,750 8.93% $17,500,000 $1,502,750 053[$3500000 + ($404250 x 2596)] After-tax salvage value in year-5 60 $17,500,000 $1,501,000 8.92% [Tax on loss on disposal of asset is a tax credit and will result cash inflow. So, added to sale value) 6 $17,500,000 $17,500,000 $1,562,750 $780,500 7 8.93% 4.46% 8