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 $1,550,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,450,000 per year, variable production costs are $240 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $20,500,000. 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 20 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 18 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

Cash Flows = Investment + NWC + Net Income + Depreciation + After-tax Salvage Value

AAI 0 1 2 3 4 5 MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 22.31% Unit Sales 76000 89000 103000 98000 79000 4573550 Investment -$    20,500,000 NWC -$      1,550,000 -$     692,250 -$     745,500 $      266,250 $   1,011,750 $   1,709,750 Salvage $   2,460,000 Sales $ 26,980,000 $ 31,595,000 $ 36,565,000 $ 34,790,000 $ 28,045,000 VC -$18,240,000 -$21,360,000 -$24,720,000 -$23,520,000 -$18,960,000 FC -$ 1,450,000 -$ 1,450,000 -$ 1,450,000 -$ 1,450,000 -$ 1,450,000 Depreciation -$ 2,929,450 -$ 5,020,450 -$ 3,585,450 -$ 2,560,450 -$ 1,830,650 EBT $   4,360,550 $   3,764,550 $   6,809,550 $   7,259,550 $   5,804,350 Taxes (30%) -$ 1,308,165 -$ 1,129,365 -$ 2,042,865 -$ 2,177,865 -$ 1,741,305 Net Income $   3,052,385 $   2,635,185 $   4,766,685 $   5,081,685 $   4,063,045 Cash Flows -$    22,050,000 $   5,289,585 $   6,910,135 $   8,618,385 $   8,653,885 $ 10,697,510 NPV $ 1,780,423.52 IRR 21.13%

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