Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emu
ID: 2784731 • Letter: A
Question
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 86,000 2 99,000 3 113,000 4 108,000 5 89,000 Production of the implants will require $1,650,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $1,550,000 per year, variable production costs are $290 per unit, and the units are priced at $405 each. The equipment needed to begin production has an installed cost of $21,500,000. 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 25 percent of its acquisition cost. AAI is in the 34 percent marginal tax bracket and has a required return on all its projects of 19 percent. What is the NPV? What is the IRR?
Explanation / Answer
Year Unit Sales Year 0 NWC 1650000
1 86,000 NWC 20%
2 99,000 TFC 1550000
3 1,13,000 VC 290
4 1,08,000 SELIING PRICE 405
5 89,000 7-yr MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%
Year 0 Year 1 Year 2 Yer 3 Year 4 Year 5
Installation cost -215,00,000 - - - - -
Disposal Value - - - - - 53,75,000
Sales - 348,30,000 400,95,000 457,65,000 437,40,000 360,45,000
TFC 15,50,000 15,50,000 15,50,000 15,50,000 15,50,000
VC 249,40,000 287,10,000 327,70,000 313,20,000 258,10,000
Depreciation 30,72,350 52,65,350 37,60,350 26,85,350 19,19,950
Profit before tax 52,67,650 45,69,650 76,84,650 81,84,650 67,65,050
Tax 17,91,001 15,53,681 26,12,781 27,82,781 23,00,117
profit after tax 34,76,649 30,15,969 50,71,869 54,01,869 44,64,933
NWC -16,50,000 -10,53,000 -11,34,000 4,05,000 15,39,000 -
Net Cash Flow -231,50,000 372,53,649 419,76,969 512,41,869 506,80,869 458,84,933
WACC 19%
PV -231,50,000 313,05,587 296,42,659 304,07,735 252,72,966 192,28,052
NPV 1127,06,999
IRR 172%
Year Unit Sales Year 0 NWC 1650000
1 86,000 NWC 20%
2 99,000 TFC 1550000
3 1,13,000 VC 290
4 1,08,000 SELIING PRICE 405
5 89,000 7-yr MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%
Year 0 Year 1 Year 2 Yer 3 Year 4 Year 5
Installation cost -215,00,000 - - - - -
Disposal Value - - - - - 53,75,000
Sales - 348,30,000 400,95,000 457,65,000 437,40,000 360,45,000
TFC 15,50,000 15,50,000 15,50,000 15,50,000 15,50,000
VC 249,40,000 287,10,000 327,70,000 313,20,000 258,10,000
Depreciation 30,72,350 52,65,350 37,60,350 26,85,350 19,19,950
Profit before tax 52,67,650 45,69,650 76,84,650 81,84,650 67,65,050
Tax 17,91,001 15,53,681 26,12,781 27,82,781 23,00,117
profit after tax 34,76,649 30,15,969 50,71,869 54,01,869 44,64,933
NWC -16,50,000 -10,53,000 -11,34,000 4,05,000 15,39,000 -
Net Cash Flow -231,50,000 372,53,649 419,76,969 512,41,869 506,80,869 458,84,933
WACC 19%
PV -231,50,000 313,05,587 296,42,659 304,07,735 252,72,966 192,28,052
NPV 1127,06,999
IRR 172%
Year Unit Sales Year 0 NWC 1650000
1 86,000 NWC 20%
2 99,000 TFC 1550000
3 1,13,000 VC 290
4 1,08,000 SELIING PRICE 405
5 89,000 7-yr MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%
Year 0 Year 1 Year 2 Yer 3 Year 4 Year 5
Installation cost -215,00,000 - - - - -
Disposal Value - - - - - 53,75,000
Sales - 348,30,000 400,95,000 457,65,000 437,40,000 360,45,000
TFC 15,50,000 15,50,000 15,50,000 15,50,000 15,50,000
VC 249,40,000 287,10,000 327,70,000 313,20,000 258,10,000
Depreciation 30,72,350 52,65,350 37,60,350 26,85,350 19,19,950
Profit before tax 52,67,650 45,69,650 76,84,650 81,84,650 67,65,050
Tax 17,91,001 15,53,681 26,12,781 27,82,781 23,00,117
profit after tax 34,76,649 30,15,969 50,71,869 54,01,869 44,64,933
NWC -16,50,000 -10,53,000 -11,34,000 4,05,000 15,39,000 -
Net Cash Flow -231,50,000 372,53,649 419,76,969 512,41,869 506,80,869 458,84,933
WACC 19%
PV -231,50,000 313,05,587 296,42,659 304,07,735 252,72,966 192,28,052
NPV 1127,06,999
IRR 172%
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