Question

Aday Acoustics, Inc., projects unit sales for a new 7-octave voice emulation implant as follows:

Year		Unit Sales
1			76,500
2			81,900
3			88,200
4			84,800
5			72,300

Production of the implants will require $1,550,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $4,150,000 per year, variable production costs are $150 per unit, and the units are priced at $332 each. The equipment needed to begin production has an installed cost of $19,200,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. The company is in the 25 percent marginal tax bracket and has a required return on all its projects of 15 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.)

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.)

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-19200000
Initial working capital		-1550000
=Initial Investment outlay		-20750000
7 years MACR rate			14.29%	24.49%	17.49%	12.49%	8.93%	22.31%
Unit sales			76500	81900	88200	84800	72300
Profits	=no. of units sold * (sales price - variable cost)		13923000	14905800	16052400	15433600	13158600
Fixed cost			-4150000	-4150000	-4150000	-4150000	-4150000
-Depreciation	=Cost of machine*MACR%		-2743680	-4702080	-3358080	-2398080	-1714560	4283520	=Salvage Value
=Pretax cash flows			7029320	6053720	8544320	8885520	7294040
-taxes	=(Pretax cash flows)*(1-tax)		5271990	4540290	6408240	6664140	5470530
+Depreciation			2743680	4702080	3358080	2398080	1714560
=after tax operating cash flow			8015670	9242370	9766320	9062220	7185090
Working capital during the project	(N+1 sales-N sales)*0.2		-358560	-418320	225760	830000
reversal of working capital							1271120
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						3600000
+Tax shield on salvage book value	=Salvage value * tax rate						1070880
=Terminal year after tax cash flows							5942000
Total Cash flow for the period		-20750000	7657110	8824050	9992080	9892220	13127090
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875	1.7490063	2.0113572
Discounted CF=	Cashflow/discount factor	-20750000	6658356.5	6672249.5	6569954.8	5655908.9	6526483.8
NPV=	Sum of discounted CF=	11332953.49

Total Cash flow for the period		-20750000	7657110	8824050	9992080	9892220	13127090
Discount factor=	(1+discount rate)^corresponding period	1	1.3433489	1.8045862	2.4241887	3.2565312	4.3746574
Discounted CF=	Cashflow/discount factor	-20750000	5700016	4889791.5	4121824.3	3037655.5	3000712.7
NPV=	Sum of discounted CF=	0.00
IRR is discount rate at which NPV = 0 =	34.33%