Question

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

Year 1 = Unit Sales of 83,000

Year 2 = Unit Sales of 96,000

Year 3 = Unit Sales of 110,000

Year 4 = Unit Sales of 105,000

Year 5 = Unit Sales of 86,000

Production of the implants will require $1,620,000 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 $1,520,000 per year, variable production costs are $275 per unit, and the units are priced at $390 each. The equipment needed to begin production has an installed cost of $21,200,000. 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 company is in the 30 percent marginal tax bracket and has a required return on all its projects of 19 percent. MACRS schedule.

  

a) What is the NPV of the project?

  

  

b) What is the IRR of the project?

Answer 1