Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emu

Question

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 75,000 2 88,000 3 102,000 4 97,000 5 78,000 Production of the implants will require $1,540,000 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 $1,440,000 per year, variable production costs are $235 per unit, and the units are priced at $350 each. The equipment needed to begin production has an installed cost of $20,400,000. 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. 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.) NPV $ 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 $

Explanation / Answer

For NPV Working 1 2 3 4 5 Revenue per year Unit Sales 75000 88000 102000 97000 78000 Price/Unit $ 350 350 350 350 350 Total Sales Value $ 26250000 30800000 35700000 33950000 27300000 Costs per year Fixed Costs 1440000 1440000 1440000 1440000 1440000 Variable Costs @ 235 per unit 17625000 20680000 23970000 22795000 18330000 Depreciation 3468000 3468000 3468000 3468000 3468000 22533000 25588000 28878000 27703000 23238000 Net Operating Margin 3717000 5212000 6822000 6247000 4062000 Tax Rate @ 30% 1115100 1563600 2046600 1874100 1218600 Margin post Taxes 2601900 3648400 4775400 4372900 2843400 Investment to be done 1540000 455000 490000 Thus, the NPV @ return rate of 17 percent is equal to 61,52,285.14 $ For the purpose of calculating IRR, we do a trial and error method whereby the NPV is 0 Since the actual rate of return is 17% Going by the trial and error method, the IRR works out to 18.85%

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