Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emu
ID: 2723480 • Letter: A
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
Project NPV:
Year
0
1
2
3
4
5
Unit Sales
-
91,000.00
104,000.00
118,000.00
113,000.00
94,000.00
Sales Price @$430
-
$39,130,000.00
$44,720,000.00
$50,740,000.00
$48,590,000.00
$40,420,000.00
Variable Production Cost @ $315
-
$28,665,000.00
$32,760,000.00
$37,170,000.00
$35,595,000.00
$29,610,000.00
Fixed Cost
-
$1,600,000.00
$1,600,000.00
$1,600,000.00
$1,600,000.00
$1,600,000.00
Depreciation Rate
14.29%
24.49%
17.49%
12.49%
8.93%
Depreciation
-
$3,143,800.00
$5,387,800.00
$3,847,800.00
$2,747,800.00
$1,964,600.00
Salvage value
-
$-
$-
$-
$-
$3,300,000.00
Inflow before taxes
-
$5,721,200.00
$4,972,200.00
$8,122,200.00
$8,647,200.00
$7,245,400.00
Tax @ 30%
-
$1,716,360.00
$1,491,660.00
$2,436,660.00
$2,594,160.00
$2,173,620.00
Net Profit after taxes
-
$4,004,840.00
$3,480,540.00
$5,685,540.00
$6,053,040.00
$5,071,780.00
Depreciation
-
$3,143,800.00
$5,387,800.00
$3,847,800.00
$2,747,800.00
$1,964,600.00
Changes in Working Capital
$-1,700,000.00
$-559,000.00
$-43,000.00
$215,000.00
$817,000.00
$1,270,000.00
Cash Flow after taxes
$-1,700,000.00
$6,589,640.00
$8,825,340.00
$9,748,340.00
$9,617,840.00
$8,306,380.00
Intial Investment
$-22,000,000.00
$-
$-
$-
$-
$-
Discounting Factor @ 17%
1.00
0.8547
0.7305
0.6244
0.5337
0.4561
NPV
$-23,700,000.00
$5,632,170.94
$6,447,030.46
$6,086,576.47
$5,132,560.78
$3,788,632.55
Project NPV = $ 3,386,971.21
d. Project IRR
The Internal Rate of Return (IRR) on a project is the rate of return at which the projects NPV equals zero. At this point, a project's cash flows are equal to the project's costs.
IRR is calculated using the NPV formula by solving for R if the NPV equals zero.
NPV= {Period Cash Flow / (1+R)^T} - Initial Investment
Cash Flows
$ -23,700,000.00
$ 6,589,640.00
$ 8,825,340.00
$ 9,748,340.00
$ 9,617,840.00
$ 8,306,380.00
IRR = 22.77%
Year
0
1
2
3
4
5
Unit Sales
-
91,000.00
104,000.00
118,000.00
113,000.00
94,000.00
Sales Price @$430
-
$39,130,000.00
$44,720,000.00
$50,740,000.00
$48,590,000.00
$40,420,000.00
Variable Production Cost @ $315
-
$28,665,000.00
$32,760,000.00
$37,170,000.00
$35,595,000.00
$29,610,000.00
Fixed Cost
-
$1,600,000.00
$1,600,000.00
$1,600,000.00
$1,600,000.00
$1,600,000.00
Depreciation Rate
14.29%
24.49%
17.49%
12.49%
8.93%
Depreciation
-
$3,143,800.00
$5,387,800.00
$3,847,800.00
$2,747,800.00
$1,964,600.00
Salvage value
-
$-
$-
$-
$-
$3,300,000.00
Inflow before taxes
-
$5,721,200.00
$4,972,200.00
$8,122,200.00
$8,647,200.00
$7,245,400.00
Tax @ 30%
-
$1,716,360.00
$1,491,660.00
$2,436,660.00
$2,594,160.00
$2,173,620.00
Net Profit after taxes
-
$4,004,840.00
$3,480,540.00
$5,685,540.00
$6,053,040.00
$5,071,780.00
Depreciation
-
$3,143,800.00
$5,387,800.00
$3,847,800.00
$2,747,800.00
$1,964,600.00
Changes in Working Capital
$-1,700,000.00
$-559,000.00
$-43,000.00
$215,000.00
$817,000.00
$1,270,000.00
Cash Flow after taxes
$-1,700,000.00
$6,589,640.00
$8,825,340.00
$9,748,340.00
$9,617,840.00
$8,306,380.00
Intial Investment
$-22,000,000.00
$-
$-
$-
$-
$-
Discounting Factor @ 17%
1.00
0.8547
0.7305
0.6244
0.5337
0.4561
NPV
$-23,700,000.00
$5,632,170.94
$6,447,030.46
$6,086,576.47
$5,132,560.78
$3,788,632.55
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