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: Year Unit Sales 1 77,000 2 90,000 3 104,000 4 99,000 5 80,000 Production of the implants will require $1,560,000 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 $1,460,000 per year, variable production costs are $245 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $20,600,000. 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 IRR of this project?

Explanation / Answer

Answer:

Capital spending -20600000 Change in NWC -1560000 Total cash outflow -22160000 77000 90000 104000 99000 80000 Year 1 2 3 4 5 Ending Book value 17656260 12611320 9008380 6435440 4595860 Sales 27720000 32400000 37440000 35640000 28800000 Variable cost 18865000 22050000 25480000 24255000 19600000 Fixed costs 1460000 1460000 1460000 1460000 1460000 Dep 2943740 5044940 3602940 2572940 1839580 EBIT 4451260 3845060 6897060 7352060 5900420 Taxes 1335378 1153518 2069118 2205618 1770126 Net income 3115882 2691542 4827942 5146442 4130294 Dep 2943740 5044940 3602940 2572940 1839580 Operating cash flow 6059622 7736482 8430882 7719382 5969874 Net cash Flows: Operating cash flow 6059622 7736482 8430882 7719382 5969874 Change in NWC -936000 -1008000 360000 1368000 1344000 Capital spending 4983758 Total cash flow 5123622 6728482 8790882 9087382 12297632

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