Question

Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 75,000 2 88,000 3 102,000 4 97,000 5 78,000 Production of the implants will require $1,540,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,440,000 per year, variable production costs are $235 per unit, and the units are priced at $350 each. The equipment needed to begin production has an installed cost of $20,400,000. 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 company is in the 30 percent marginal tax bracket and has a required return on all its projects of 17 percent. MACRS schedule. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ What is the IRR of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %

Answer 1

The calculation of NPV and IRR is as shown below:

The Working capital requirements are 10% of the increase in sales. If there is a decrease in sales the next year, 10% of that decrease in working capital is returned and at the end of the 5 year period, the entire working capital returned.

The book value is higher than the sale value and hence there is no tax on the resale of the equipment after 5 years.

Year	0	1	2	3	4	5
Initial Cost	-20400000
Sales Units		75000	88000	102000	97000	78000
Sales Revenue		26250000	30800000	35700000	33950000	27300000
Variable cost		-17625000	-20680000	-23970000	-22795000	-18330000
Fixed costs		-1440000	-1440000	-1440000	-1440000	-1440000
Depreciation % MACRS		14.29%	24.49%	17.49%	12.49%	8.93%
Depreciation Amount		-2915160	-4995960	-3567960	-2547960	-1821720
Profit before tax		4344840	3772040	6824040	7264040	5786280
Taxes at 30%		-1303452	-1131612	-2047212	-2179212	-1735884
Net income		3041388	2640428	4776828	5084828	4050396
Add back depreciation		2915160	4995960	3567960	2547960	1821720
After tax salvage value						3060000
Working Cap. Req.	-1540000	-455000	-490000	175000	665000	1645000
Net cash flow	-21940000	5501548	7146388	8519788	8297788	10577116
NPV at 17%	$ 2,554,671.36
IRR	21.46%

NPV = $2,554,671.36

IRR = 21.46%

The excel screen shot as show below: