Question

Samsung Inc. estimate unit sales for a new music amplifier as follows: 75,000; 86,000; 95,000; 92,000; and 73,000 for year 1 through year 5, respectively. Production of the implants will require $1,600,000 in net working capital to start and additional net working capital investments each year equal to 18 percent of the projected sales increase for the following year. Total fixed costs are $1,800,000 per year, variable production costs are $250 per unit, and the units are priced at $340 each. The equipment needed to begin production has an installed cost of $16,200,000. This equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The firm is in the 37 percent marginal tax bracket and has a required return on all its projects of 16 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?

Answer 1