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:

Year Unit Sales

1 88,000

2 101,000

3 115,000

4 110,000

5 91,000

Production of the implants will require $1,670,000 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 $1,570,000 per year, variable production costs are $300 per unit, and the units are priced at $415 each. The equipment needed to begin production has an installed cost of $21,700,000. 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.)

Already got the IRR= 24.09

NPV= ???

Explanation / Answer

Calculation of Depreciation as per MACRS:

Calculation of sales and NWC:

Calculation of NPV

Note: WDV of equipment = 9234966

Selling price = 21700000 x 0.15 = 3255000

Loss on sale = $5979966

Sales net of tax = 3255000 + (5979966 x 0.30) = $5048990

NPV = $1015676

Year Opening bal Dep rate % Depreciation Tax savings Closing bal 1 21700000 14.29 3100930 930279 18599070 2 18599070 24.49 4554912 1366474 14044158 3 14044158 17.49 2456323 736897 11587835 4 11587835 12.49 1447321 434196 10140514 5 10140514 8.93 905548 271664 9234966

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