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 $1,650,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $1,550,000 per year, variable production costs are $290 per unit, and the units are priced at $405 each. The equipment needed to begin production has an installed cost of $21,500,000. 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 25 percent of its acquisition cost. AAI is in the 34 percent marginal tax bracket and has a required return on all its projects of 19 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

Calculation of Depreciation:

Cost of Equipment=$21,500,000

1st year Depreciation=$21,500,000×0.20 =$4,300,000

2nd year Depreciation=$21,500,000×0.32 =$6,880,000

3rd year Depreciation=$21,500,000×0.192 =$4,128,000

4th year Depreciation=$21,500,000×0.1152 =$2,476,800

5th year Depreciation=$21,500,000×0.1152 =$2,476,800

Calculation of production cost:

1st year production cost=`86,000×290=$24,940,000

2nd year production cost=`99,000×290=$28,710,000

3rd year production cost=113,000×290=$32,770,000

4th year production cost=108,000×290=$31,320,000

5th year production cost=`89,000×290=$25,810,000

Calculation of Total Revenue:

1st year production cost=`86,000×405=$34,830,000

2nd year production cost=`99,000×405=$40,095,000

3rd year production cost=113,000×405=$45,765,000

4th year production cost=108,000×405=$43,740,000

5th year production cost=`89,000×405=$36,045,000

Calculation of Cash flows after Taxes:

(1)     (2)               (3)                  (4)                    (5)              (6)                 (7)                  (8)        

Year Revenue     Fixed cost product. cost Depreciation   Total cost          PBT            Tax  
                                                                                             3+4+5               2–6

1. 34,830,000   1,550,000      24,940,000     4,300,000    30,790,000   4,040,000 1,373,600    

2.   40,095,000   1,550,000      28,710,000     6,880,000    37,140,000   2,955,000 1,004,000

3.   45,765,000   1,550,000      32,770,000     4,128,000    38,448,000   7,317,000 2,487,780

4.   43,740,000   1,550,000     31,320,000     2,476,800   35,346,800   8,393,200 2,853,6885.

5.   36,045,000   1,550,000    

                          (9)           (10)

Year    After tax profit   Cash flows after tax

              7–8                        9+5

1

2

3

4

5

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