Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Year		Unit Sales
1			72,000
2			85,000
3			99,000
4			94,000
5			75,000

Production of the implants will require $1,510,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,410,000 per year, variable production costs are $220 per unit, and the units are priced at $335 each. The equipment needed to begin production has an installed cost of $20,100,000. 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 15 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 17 percent. Refer to Table 8.3.

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 %hat is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Answer 1

NPV AND IRR:
Year	cash outflow	Revenue	variable cost	Fixed cost	Dep. Rate	Dep. Amount	IBT	Tax	Cash Inflow	Discount 17%	PV	Dis 18% (for IRR)	PV-18%
0	-20100000	0							-20100000	1	-20100000
0	-1510000	0							-1510000	1	-1510000
1	-435500	24120000	15840000	1410000	14.29%	2872290	3997710	1199313	5235187	0.855	4476085	0.847	4434203
2	-469000	28475000	18700000	1410000	24.49%	4922490	3442510	1032753	6863247	0.731	5017034	0.718	4927811
3		33165000	21780000	1410000	17.49%	3515490	6459510	1937853	8037147	0.624	5015180	0.609	4894623
4		31490000	20680000	1410000	12.49%	2510490	6889510	2066853	7333147	0.534	3915900	0.516	3783904
5		25125000	16500000	1410000	8.93%	1794930	5420070	1626021	5588979	0.456	2548574	0.437	2442384
Working Capi									2414500	0.456	1101012	0.437	1055137
Salvage							3015000	904500	2110500	0.456	962388	0.437	922289
NPV											1426173
PV for IRR											23036173		22460350
IRR = 17% + [(23036173-21610000)/(23036173-22460350)]*(18-17)%
IRR = 17% + 2.48% = 19.48%