Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Production of the implants will require $2,100,000 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 $4,400,000 per year, variable production costs are $267 per unit, and the units are priced at $411 each. The equipment needed to begin production has an installed cost of $18,900,000. 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 25 percent of its acquisition cost. The tax rate is 22 percent the required return is 18 percent. MACRS schedule What is the NPV of the project? What is the IRR?

Year	Unit Sales
1	75,400
2	88,400
3	108,000
4	100,600
5	68,500

Answer 1

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VERY GOOD SUM FROM CORPORATE FINANCE : ROSS BOOK.