Year Unit Sales 1 109,000 2 125,000 3 136,000 4 158,000 5 97,000 Production of the...

Year   Unit Sales
1   109,000
2   125,000
3   136,000
4   158,000
5   97,000

Production of the implants will require $812,000 in net working capital to start and additional net working capital investments each year equal to 20% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWC cash flow occurring for Year 4.) Total fixed costs are $194,000 per year, variable production costs are $290 per unit, and the units are priced at $400 each. The equipment needed to begin production has an installed cost of $21.5 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20%). In five years, this equipment can be sold for about 25% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 25%.

Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?

Expert Solution

Year	0	1	2	3	4	5
1.Equipment cost	-21500000

Increase in sales(from line 5)			6400000	4400000	8800000
Beg.NWC	0	812000	1280000	880000	1760000
End. NWC	812000	1280000	880000	1760000	0
2.Change in NWC	-812000	-468000	400000	-880000	1760000

3.ATCF on salvage(ref. wkgs.)						6395304

4.Sales units		109000	125000	136000	158000	97000
5.Sales $ at $ 400 /unit(4*$400)		43600000	50000000	54400000	63200000	38800000
6.Variable costs(4*$290)		-31610000	-36250000	-39440000	-45820000	-28130000
7.Fixed costs		-194000	-194000	-194000	-194000	-194000
8.Depn.(ref.wkgs.)		-2150000	-3870000	-3096000	-2476800	-1981440
9.EBIT(sum 5 to 8)		9646000	9686000	11670000	14709200	8494560
10. Tax at 40%(9*40%)		-3858400	-3874400	-4668000	-5883680	-3397824
11. NOPAT(9+10)		5787600	5811600	7002000	8825520	5096736
12. Add back: Depn.(Row 8)		2150000	3870000	3096000	2476800	1981440
13. Op. cash flow(11+12)		7937600	9681600	10098000	11302320	7078176

14.Total annual FCFs(1+2+3+13)	-22312000	7469600	10081600	9218000	13062320	13473480
15.PV F at 25%(1/1.2%^yr.n)	1	0.8	0.64	0.512	0.4096	0.32768
16.PV at 25%(14*15)	-22312000	5975680	6452224	4719616	5350326.3	4414989.9
17.NPV at 25%(sumr ow 16)	4600836.20
18.IRR(Of FCF row 14)	33.7%

Depreciation wkgs.
Year	Depn.(20*BV)	UCC/Book value
0		21500000
1	2150000	19350000	2150000020%50%
2	3870000	15480000
3	3096000	12384000
4	2476800	9907200
5	1981440	7925760	Carrying/Book value
		5375000	salvage(21500000*25%)
		2550760	Loss on salvage
		1020304	Tax saved on loss(40%*2550760)
		6395304	ATCF on salvage(5375000+1020304)

ekkarill92 answered 2 years ago

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