Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 74,000 2 87,000 3 101,000 4 96,000 5 77,000 Production of the implants will require $1,530,000 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 $1,430,000 per year, variable production costs are $230 per unit, and the units are priced at $345 each. The equipment needed to begin production has an installed cost of $20,300,000. 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. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 19 percent. Refer to Table 8.3. 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 $ 633752.41 What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR 21.88 %

Answer 1

AAI	0	1	2	3	4	5
MACRS		14.29%	24.49%	17.49%	12.49%	8.93%	22.31%
Unit Sales		74000	87000	101000	96000	77000	$ 4,528,930
Investment	-$    20,300,000
NWC	-$       1,530,000	-$      897,000	-$      966,000	$       345,000	$   1,311,000	$   1,737,000
Salvage						$   5,075,000
Sales		$ 25,530,000	$ 30,015,000	$ 34,845,000	$ 33,120,000	$ 26,565,000
VC		-$ 17,020,000	-$ 20,010,000	-$ 23,230,000	-$ 22,080,000	-$ 17,710,000
FC		-$   1,430,000	-$   1,430,000	-$   1,430,000	-$   1,430,000	-$   1,430,000
Depreciation		-$   2,900,870	-$   4,971,470	-$   3,550,470	-$   2,535,470	-$   1,812,790
EBT		$   4,179,130	$   3,603,530	$   6,634,530	$   7,074,530	$   5,612,210
Taxes (30%)		-$   1,253,739	-$   1,081,059	-$   1,990,359	-$   2,122,359	-$   1,683,663
Net Income		$   2,925,391	$   2,522,471	$   4,644,171	$   4,952,171	$   3,928,547
Cash Flows	-$    21,830,000	$   4,929,261	$   6,527,941	$   8,539,641	$   8,798,641	$ 12,389,516
NPV	$ 1,569,022.63
IRR	21.73%

Revenues = Unit Sales x 345

VC = Unit Sales x 230

Depreciation = Investment x MACRS%

NWC = 20% x Increase in Revenues

Book Value of equipment after 5 years = (1 - sum of MACRS%) x Investment

Cash Flows = Investment + NWC + Net Income + Depreciation + (Salvage - BV) x (-Tax rate) + Salvage

NPV and IRR can be calculated using the same function using 19% discount rate.