Problem 10-32 Project Evaluation [LO1] Aria Acoustics, Inc. (AAI), projects unit
ID: 2710499 • Letter: P
Question
Problem 10-32 Project Evaluation [LO1] Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 82,000 2 95,000 3 109,000 4 104,000 5 85,000 Production of the implants will require $1,610,000 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 $1,510,000 per year, variable production costs are $270 per unit, and the units are priced at $385 each. The equipment needed to begin production has an installed cost of $21,100,000. 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. 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 $ 98968.70 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
Sales Price
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sales Unit 82,000 95,000 109,000 104,000 85,000Sales Price
385 385 385 385 385 Revenue 31,570,000 36,575,000 41,965,000 40,040,000 32,725,000 Sales Increase 5,005,000 5,390,000 (1,925,000) (7,315,000) MACRS rate 14.29 24.49 17.49 12.49 8.93 Investment (21,100,000) Net WC (1,610,000) Incremental WC (500,500) (539,000) - Revenue 31,570,000 36,575,000 41,965,000 40,040,000 32,725,000 Variable cost (22,140,000) (25,650,000) (29,430,000) (28,080,000) (22,950,000) Fixed Cost (1,510,000) (1,510,000) (1,510,000) (1,510,000) (1,510,000) Depreciation (3,015,190) (5,167,390) (3,690,390) (2,635,390) (1,884,230) Salvage 3,165,000.0 Total Pretax Income 4,904,810.0 4,247,610.0 7,334,610.0 7,814,610.0 9,545,770.0 Tax@30% 1,471,443.0 1,274,283.0 2,200,383.0 2,344,383.0 2,863,731.0 Post Tax Income 3,433,367.0 2,973,327.0 5,134,227.0 5,470,227.0 6,682,039.0 Add back depreciation 3,015,190.0 5,167,390.0 3,690,390.0 2,635,390.0 1,884,230.0 Total Cash in Flow (with WC requirement) 5,948,057.0 7,601,717.0 8,824,617.0 8,105,617.0 8,566,269.0 Discount Factor @17% 1 0.855 0.731 0.624 0.534 0.456 PV of Cash in Flow 24,379,531 5,083,809 5,553,157 5,509,831 4,325,563 3,907,171 NPV 1,669,531.44 So NPV is $1,669,531.44 IRR Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment (21,100,000) Net WC (1,610,000) Revenue 31,570,000 36,575,000 41,965,000 40,040,000 32,725,000 Variable cost (22,140,000) (25,650,000) (29,430,000) (28,080,000) (22,950,000) Fixed Cost (1,510,000) (1,510,000) (1,510,000) (1,510,000) (1,510,000) Depreciation (3,015,190) (5,167,390) (3,690,390) (2,635,390) (1,884,230) Salvage 3,165,000 Total Pretax Income 4,904,810 4,247,610 7,334,610 7,814,610 9,545,770 Tax@30% 1,471,443 1,274,283 2,200,383 2,344,383 2,863,731 Post Tax Income 3,433,367 2,973,327 5,134,227 5,470,227 6,682,039 Add back depreciation 3,015,190 5,167,390 3,690,390 2,635,390 1,884,230 Total Cash in Flow (with WC requirement) 5,948,057 7,601,717 8,824,617 8,105,617 8,566,269 Discount Factor @19.97% 1 0.834 0.695 0.579 0.483 0.402 PV of Cash in Flow 22,710,003 4,957,954 5,281,611 5,110,671 3,912,870 3,446,898 NPV 3 So IRR is 19.97% as NPV is 0 at this rateRelated Questions
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