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 $1,550,000 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. The company 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 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

So, the cash flows during the life of project can be calculated as:

Year 0: -20500000-1550000

= -22050000

Year 1: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 1: = (76000*355 - 76000*240 - 1450000 - 0.1429*20500000)*(1-0.3) + 0.1429*20500000 - 0.15*(76000-0)*355

= 1934835

Year 2: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 2: = (89000*355 - 89000*240 - 1450000 - 0.2449*20500000)*(1-0.3) + 0.2449*20500000 - 0.15*(89000-76000)*355

= 6963385

Year 3: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 3: = (103000*355 - 103000*240 - 1450000 - 0.1749*20500000)*(1-0.3) + 0.1749*20500000 - 0.15*(103000-89000)*355

= 7606635

Year 4: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 4: = (98000*355 - 98000*240 - 1450000 - 0.1249*20500000)*(1-0.3) + 0.1249*20500000 - 0.15*(98000-103000)*355

= 7908385

Year 5: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC + After tax salvage value + release of initial working capital

Year 5: = (79000*355 - 79000*240 - 1450000 - 0.0893*20500000)*(1-0.3) + 0.0893*20500000 - 0.15*(79000-98000)*355 + (20500000*0.2 - (0.3*(20500000*0.2-20500000*(0.0893+0.0892+0.0446))) + 1550000

= 12697510

So, NPV = -22050000 + 1934835/1.18 + 6963385/1.18^2 + 7606635/1.18^3 + 7908385/1.18^4 + 12697510/1.18^5

= -1150426.09

IRR can be calculated in excel as = IRR(series of cash flows)

= 16.12%

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