Question

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

Year		Unit Sales
1			72,600
2			78,000
3			83,000
4			80,900
5			67,100

Production of the implants will require $1,420,000 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 $3,500,000 per year, variable production costs are $137 per unit, and the units are priced at $319 each. The equipment needed to begin production has an installed cost of $17,900,000. 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 20 percent of its acquisition cost. The company is in the 22 percent marginal tax bracket and has a required return on all its projects of 16 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

IN years 3 and 4, there is no additional working capital investment required as the sales decrease in the following years. The entire working capital investment is assumed to be recovered at the end of year 5

operating cash flow (OCF) each year = income after taxes + depreciation

book value of equipment at end of year 5 = purchase cost - accumulated depreciation

loss on sale of equipment = salvage value - book value

terminal cash flow = recovery of working capital + after tax salvage value

NPV is $11,624,011.50

IRR is 37.87%