Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emu
ID: 2812211 • Letter: A
Question
Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:
Production of the implants will require $1,750,000 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 $1,400,000 per year, variable production costs are $230 per unit, and the units are priced at $350 each. The equipment needed to begin production has an installed cost of $25,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS (MACRS Table) property. In five years, this equipment can be sold for about 10 percent of its acquisition cost. AAI is in the 34 percent marginal tax bracket and has a required return on all its projects of 17 percent.
***DO NOT USE EXCEL. I NEED TO KNOW HOW TO SOLVE ON PAPER PLEASE.****
What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Net present value $
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.)
Internal rate of return %
Year Unit Sales 1 110,500 2 129,500 3 117,500 4 100,500 5 86,500Explanation / Answer
Depreciation of 5 years from above table = 19,810,950
Book value = 25,500,000 - 19,810,950 = 5,689,050
Sale value = 10% of 25,500,000 = 2,550,000
Loss on sale = 5,689,050 - 2,550,000 = 3,139,050
Tax saving @ 34 % = 3,139,050 * 34% = 1,067,277
Therefore after tax salvage value = 2,550,000 + 1.067,277 = 3.617,277
Calculation IRR
Let us take two rate and compute NPV at both rates
NPV @ 25% = 804,532
AND NPV @ 27% = -297,270
Now IRR = L.R. + NPV(L) / NPV(L) - NPV(H) * (HR - LR)
IRR = 25% + 804,532 / 804,532 - (-297,270) * (27-25)
IRR = 26.46%
PARTICULARS YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 Year 5 Sales - 38,675,000.00 45,325,000.00 41,125,000.00 35,175,000.00 30,275,000.00 Less: Variable Costs - 25,415,000.00 29,785,000.00 27,025,000.00 23,115,000.00 19,895,000.00 Less: Fixed cost 1,400,000.00 1,400,000.00 1,400,000.00 1,400,000.00 1,400,000.00 Less: Depreciation - 3,643,950.00 6,244,950.00 4,459,950.00 3,184,950.00 2,277,150.00 Profit before tax - 8,216,050.00 7,895,050.00 8,240,050.00 7,475,050.00 6,702,850.00 Less: tax @ 34% - 2,793,457.00 2,684,317.00 2,801,617.00 2,541,517.00 2,278,969.00 Net Income - 5,422,593.00 5,210,733.00 5,438,433.00 4,933,533.00 4,423,881.00 Add: Depreciation - 3,643,950.00 6,244,950.00 4,459,950.00 3,184,950.00 2,277,150.00 OCF - 9,066,543.00 11,455,683.00 9,898,383.00 8,118,483.00 6,701,031.00 Less: Investment 25500000 0 0 0 0 - Add: Addition to NWC 1750000 1330000 0 0 0 3,080,000.00 Add: After tax salvage value - 0 0 0 3,617,277.00 CF -27250000 7,736,543.00 11,455,683.00 9,898,383.00 8,118,483.00 13,398,308.00 PVF@17% 1 0.85 0.73 0.62 0.53 0.46 NPV PV -27250000 6,612,429.91 8,368,531.67 6,180,258.90 4,332,428.84 6,111,117.70 4,354,767.03Related Questions
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