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Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year...

Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:

Year Unit Sales
1 101,000
2 115,000
3 125,000
4 145,000
5 90,000

Production of the implants will require $753,000 in net working capital to start and additional net working capital investments each year equal to 15% 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 $177,000 per year, variable production costs are $309 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $10.0 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 20% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 18%.

Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? (Enter your answer in dollars, not in millions of dollars, i.e. 1,234,567. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.

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Expert Solution

Year 0 1 2 3 4 5
1.Equipment cost -10000000
Increase in sales(from line 5) 5040000 3600000 7200000
Beg.NWC 0 753000 756000 540000 1080000
End. NWC 753000 756000 540000 1080000 0
2.Change in NWC -753000 -3000 216000 -540000 1080000
3.ATCF on salvage(ref. wkgs.) 2674560
4.Sales units 101000 115000 125000 145000 90000
5.Sales $ at $ 360 /unit(4*$360) 36360000 41400000 45000000 52200000 32400000
6.Variable costs(4*$309) -31209000 -35535000 -38625000 -44805000 -27810000
7.Fixed costs -177000 -177000 -177000 -177000 -177000
8.Depn.(ref.wkgs.) -1000000 -1800000 -1440000 -1152000 -921600
9.EBIT(sum 5 to 8) 3974000 3888000 4758000 6066000 3491400
10. Tax at 40%(9*40%) -1589600 -1555200 -1903200 -2426400 -1396560
11. NOPAT(9+10) 2384400 2332800 2854800 3639600 2094840
12. Add back: Depn.(Row 8) 1000000 1800000 1440000 1152000 921600
13. Op. cash flow(11+12) 3384400 4132800 4294800 4791600 3016440
14.Total annual FCFs(1+2+3+13) -10753000 3381400 4348800 3754800 5871600 5691000
15.PV F at 18%(1/1.18%^yr.n) 1.0 0.84746 0.71818 0.60863 0.51579 0.43711
16.PV at 18%(14*15) -10753000 2865593.2 3123240.4 2285287.2 3028506 2487589
17.NPV at 18%(sum row 16) 3037215.38
18.IRR(Of FCF row 14) 28.76%
Depreciation wkgs.
Year Depn.(20*BV) UCC/Book value
0 10000000
1 1000000 9000000 10000000*20%*50%
2 1800000 7200000
3 1440000 5760000
4 1152000 4608000
5 921600 3686400 Carrying/Book value
2000000 salvage(10000000*20%)
1686400 Loss on salvage
674560 Tax saved on loss(40%*1686400)
2674560 ATCF on salvage(2000000+674560)

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