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:

Production of the implants will require $1,700,000 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 $1,600,000 per year, variable production costs are $315 per unit, and the units are priced at $430 each. The equipment needed to begin production has an installed cost of $22,000,000. 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.)

What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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

Explanation / Answer

The NPV is calculated as per the below table:

The IRR of the project has to calculated by trial and error method which would be ontained by equating the future cash flows to the inital cash outflow:

Hence 237 = 67.57/(1+r) + 84.47/(1+r)^2 + 95.33/(1+r)^3 + 88.01/(1+r)^4 + 103.36/(1+r)^5

By trial and error method interal rate of return is 23% .

Year 0 1 2 3 4 5 Installed Cost -22000000 Initial Working Capital -1700000 Revenue 39130000 44720000 50740000 48590000 40420000 Variable Cost 28665000 32760000 37170000 35595000 29610000 Fixed Cost 1600000 1600000 1600000 1600000 1600000 Additonal Working Capital 559000 602000 Depriciation percentage as per MACRS table 14.29% 24.49% 17.49% 12.49% 8.93% Depriciation Amount 3143800 5387800 3847800 2747800 1964600 Profit Before Tax 5162200 4370200 8122200 8647200 7245400 Tax at 30% 1548660 1311060 2436660 2594160 2173620 Profit After Tax 3613540 3059140 5685540 6053040 5071780 Add Back Depriciation 3143800 5387800 3847800 2747800 1964600 Add Back all the Net Working capital used 2861000 Add:Salvage Value 3300000 Total operating Cash flow -23700000 6757340 8446940 9533340 8800840 10336380 Dsicount rate at 17% 0.854701 0.730514 0.624371 0.53365 0.4561112 Discounted Cash Flow -23700000 5775504 6170604 5952337 4696569 4714538.2 NPV $3609552.09

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