Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emu
ID: 2726394 • Letter: A
Question
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 78,000 2 91,000 3 105,000 4 100,000 5 81,000 Production of the implants will require $1,570,000 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 $1,470,000 per year, variable production costs are $250 per unit, and the units are priced at $365 each. The equipment needed to begin production has an installed cost of $20,700,000. 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?
Explanation / Answer
Initial Investment = $20,700,000 + $1,570,000 = $22,270,000
Salvage Value = $20,700,000 x 15% = $3,105,000
7 Years Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$20,700,000.00
14.286%
$2,957,202.00
$2,957,202.00
$17,742,798.00
2
$20,700,000.00
24.490%
$5,069,430.00
$8,026,632.00
$12,673,368.00
3
$20,700,000.00
17.493%
$3,621,051.00
$11,647,683.00
$9,052,317.00
4
$20,700,000.00
12.495%
$2,586,465.00
$14,234,148.00
$6,465,852.00
5
$20,700,000.00
8.925%
$1,847,475.00
$16,081,623.00
$4,618,377.00
6
$20,700,000.00
8.925%
$1,847,475.00
$17,929,098.00
$2,770,902.00
7
$20,700,000.00
8.925%
$1,847,475.00
$19,776,573.00
$923,427.00
8
$20,700,000.00
4.462%
$923,634.00
$20,700,207.00
-$207.00
Operating Cash Flows:
Year
1
2
3
4
5
Sales (Units sold*$365)
$28,470,000
$33,215,000
$38,325,000
$36,500,000
$29,565,000
Less: Variable Cost(Units sold *$250)
$19,500,000
$22,750,000
$26,250,000
$25,000,000
$20,250,000
Less: Fixed Cost
$1,470,000
$1,470,000
$1,470,000
$1,470,000
$1,470,000
Less: Depreciation
$2,957,202
$5,069,430
$3,621,051
$2,586,465
$1,847,475
EBT
$4,542,798
$3,925,570
$6,983,949
$7,443,535
$5,997,525
Less: tax @ 30%
$1,362,839
$1,177,671
$2,095,185
$2,233,061
$1,799,258
Net Income
$3,179,959
$2,747,899
$4,888,764
$5,210,475
$4,198,268
Add: Depreciation
$2,957,202
$5,069,430
$3,621,051
$2,586,465
$1,847,475
Less: NWC (10% of sales increase in following year)
$474,500
$511,000
-$182,500
-$693,500
$0
Add: Recovery of initial NWC
$0
$0
$0
$0
$1,570,000
Add: Salvage Value of Machine
$0
$0
$0
$0
$3,105,000
Operating Cash Flow
$5,662,661
$7,306,329
$8,692,315
$8,490,440
$10,720,743
NPV = -$22,270,000 + [($5,662,661)/(1.17)] + [($7,306,329)/(1.17)2] + [($8,629,315)/(1.17)3] + [($8,490,440)/(1.17)4] + [($10,720,743)/(1.17)5] = $2,755,252.60
IRR:
0 = -$22,270,000 + [($5,662,661)/(IRR)] + [($7,306,329)/(IRR)2] + [($8,629,315)/(IRR)3] + [($8,490,440)/(IRR)4] + [($10,720,743)/(IRR)5] = 21.75%
7 Years Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$20,700,000.00
14.286%
$2,957,202.00
$2,957,202.00
$17,742,798.00
2
$20,700,000.00
24.490%
$5,069,430.00
$8,026,632.00
$12,673,368.00
3
$20,700,000.00
17.493%
$3,621,051.00
$11,647,683.00
$9,052,317.00
4
$20,700,000.00
12.495%
$2,586,465.00
$14,234,148.00
$6,465,852.00
5
$20,700,000.00
8.925%
$1,847,475.00
$16,081,623.00
$4,618,377.00
6
$20,700,000.00
8.925%
$1,847,475.00
$17,929,098.00
$2,770,902.00
7
$20,700,000.00
8.925%
$1,847,475.00
$19,776,573.00
$923,427.00
8
$20,700,000.00
4.462%
$923,634.00
$20,700,207.00
-$207.00
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