Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation

Question

Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows:

Production of the implants will require $1,590,000 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 $1,490,000 per year, variable production costs are $260 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of $20,900,000. 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. The company is in the 30 percent marginal tax bracket and has a required return on all its projects of 19 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 of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows:

Explanation / Answer

NWC = Change in Sales x 20%

Salvage = 25% x Investment

Sales = 375 x Unit Sales

VC = 260 x Unit Sales

Depreciation = Investment x MACRS %

Cash Flows = Investement + NWC + Net Income + Depreciation + Salvage Value

NPV and IRR can be calculated using NPV and IRR function on a calculator or excel

NPV = $2,460,791.68

IRR = 23.13%

AAI 0 1 2 3 4 5 MACRS 14.29% 24.49% 17.49% 12.49% 8.93% Unit Sales 80000 93000 107000 102000 83000 Investment -$      20,900,000 NWC -$        1,590,000 -$     975,000 -$ 1,050,000 $      375,000 $   1,425,000 $   1,815,000 Salvage $   5,225,000 Sales $ 30,000,000 $ 34,875,000 $ 40,125,000 $ 38,250,000 $ 31,125,000 VC -$20,800,000 -$24,180,000 -$27,820,000 -$26,520,000 -$21,580,000 FC -$ 1,490,000 -$ 1,490,000 -$ 1,490,000 -$ 1,490,000 -$ 1,490,000 Depreciation -$ 2,986,610 -$ 5,118,410 -$ 3,655,410 -$ 2,610,410 -$ 1,866,370 EBT $   4,723,390 $   4,086,590 $   7,159,590 $   7,629,590 $   6,188,630 Taxes (30%) -$ 1,417,017 -$ 1,225,977 -$ 2,147,877 -$ 2,288,877 -$ 1,856,589 Net Income $   3,306,373 $   2,860,613 $   5,011,713 $   5,340,713 $   4,332,041 Cash Flows -$      22,490,000 $   5,317,983 $   6,929,023 $   9,042,123 $   9,376,123 $ 13,238,411 NPV $   2,460,791.68 IRR 23.13%

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