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 $1,670,000 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.)

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 NPV:

IRR:

Present value of cash flow at discount value 17% = $27699517 (as calculated above)

Present value of cash flow at discount value 16% = $28404443

Initial cash outflow = $23370000

IRR = 16% + [ ($28404443 - $23370000) / ($28404443 - $27699517) ] % = 23.14%

Yr 0 1 2 3 4 5 Sales units 88000 101000 115000 110000 91000 contribution (@ $115) 10120000 11615000 13225000 12650000 10465000 Less Fixed cost 1570000 1570000 1570000 1570000 1570000 Less Depreciation 3100930 5314330 3795330 2710330 1937810 Income befor tax 5449070 4730670 7859670 8369670 6957190 Tax 1634721 1419201 2357901 2510901 2087157 Net Income 3814349 3311469 5501769 5858769 4870033 Add: Non cash item (depreciation) 3100930 5314330 3795330 2710330 1937810 cash inflow (a) 6915279 8625799 9297099 8569099 6807843 Terminal Cash inflow: working capital 2790500 salvage 3255000 total terminal inflow (b) 6045500 Initial cash outflow: working capital (1670000) (539500) (581000) cost & installation (21700000)       total initial cash outflow (c) (23370000) (539500) (581000) Net Annual cash flow (a+b+c) (23370000) 6915279 8086299 8716099 8569099 6807843 Dis factor (17%) 1 0.855 0.731 0.624 0.534 0.456 Present Value (23370000) 5912564 5911084 5438846 4575899 5861124 Net Present Value $4,329,517 Present Value (16%) (23370000) 5960970 6008120 5587019 4730143 6118191

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