Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice

Question

Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Production of the implants will require $1,690,000 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 $1,590,000 per year, variable production costs are $310 per unit, and the units are priced at $425 each. The equipment needed to begin production has an installed cost of $21,900,000. 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 20 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 18 percent. Refer to Table 10.7.

What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the IRR? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Explanation / Answer

NPV = 4,288,175.46

IRR= 24.84%

0 1 2 3 4 5 Initial cost -21900000 Unit sales 90000 103000 117000 112000 93000 Revenue 38250000 43775000 49725000 47600000 39525000 Variable cost -27900000 -31930000 -3.6E+07 -3.5E+07 -28830000 Fixed cost -1590000 -1590000 -1590000 -1590000 -1590000 Depreciation 14.29% 24.49% 17.49% 12.49% 8.93% Depreciation -3129510 -5363310 -3830310 -2735310 -1955670 Net income 3941343 3424183 5624283 5988283 5004531 Market value 4380000 Book value 4885890 Cash flow from sale of asset 4531767 Change in working capital 1690000 828750 892500 -318750 -1211250 0 Recovery of working capital 1881250 Net cash flow -23590000 6242103 7894993 9773343 9934843 13373218 NPV                    4,288,175.46

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