Question

Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 76,000 2 89,000 3 103,000 4 98,000 5 79,000 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 15 percent of the projected sales increase for the following year. Total fixed costs are $1,450,000 per year, variable production costs are $240 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $20,500,000. 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 company is in the 30 percent marginal tax bracket and has a required return on all its projects of 18 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

Year	0	1	2	3	4	5	NPV
Initial Outflow
Cost of Project	-20,500,000
Working Capital (outflow)/Inflow	-1,550,000	-3,189,250	-745,500	266,250	1,011,750	4,206,750
Salvage Value						4,100,000
Tax saving due to loss on sale						142,065
Capital(Outflow)/Inflow	-22,050,000	-3,189,250	-745,500	266,250	1,011,750	8,448,815
Sales (units)		76,000	89,000	103,000	98,000	79,000
Sales Price/unit		355	355	355	355	355
Sales Volume		26,980,000	31,595,000	36,565,000	34,790,000	28,045,000
Variable Cost/unit		240	240	240	240	240
Total Variable cost		-18,240,000	-21,360,000	-24,720,000	-23,520,000	-18,960,000
Cash Fixed Cost		-1,450,000	-1,450,000	-1,450,000	-1,450,000	-1,450,000
Deprecation Rate		14.29%	24.49%	17.49%	12.49%	8.93%
Deprecation		-2,929,450	-5,020,450	-3,585,450	-2,560,450	-1,830,650
Profit Before tax		4,360,550	3,764,550	6,809,550	7,259,550	5,804,350
Tax at 30%		1,308,165	1,129,365	2,042,865	2,177,865	1,741,305
Net Income		3,052,385	2,635,185	4,766,685	5,081,685	4,063,045
Add: Depreciation		2,929,450	5,020,450	3,585,450	2,560,450	1,830,650
Operating Cash Flow		5,981,835	7,655,635	8,352,135	7,642,135	5,893,695
Free Cash Flow	-22,050,000	2,792,585	6,910,135	8,618,385	8,653,885	14,342,510
Disc Rate	1.00000	0.84746	0.71818	0.60863	0.51579	0.43711
=1/(1+18%)^n
Disc. Cash Flow	-22,050,000	2,366,597	4,962,751	5,245,415	4,463,578	6,269,243	1,257,585
IRR
Lets discount this project with 19% &21%
Year	0	1	2	3	4	5
Free Cash Flow	-22,050,000	2,792,585	6,910,135	8,618,385	8,653,885	14,342,510
Disc Rate	1.00000	0.84034	0.70616	0.59342	0.49867	0.41905
=1/(1+19%)^n
Disc. Cash Flow	-22,050,000	2,346,710	4,879,694	5,114,286	4,315,422	6,010,220	616,332
Disc Rate	1.00000	0.82645	0.68301	0.56447	0.46651	0.38554
=1/(1+21%)^n
Disc. Cash Flow	-22,050,000	2,307,921	4,719,715	4,864,854	4,037,101	5,529,658	-590,750
IRR=(19+(616332/(616332+590750))*(21-19))/100				20.00%
Working Note
Calculation of tax saving due to loss on sale
Salvage Price=20500000*20%			4,100,000
Cost Price		20,500,000
Depreciation charged		-15,926,450
Book Value			4,573,550
Loss			-473,550
Tax saving on Loss=473550*30%			142,065