Aria Acoustics, Inc. (AA), projects unit sales for new seven-octave voice emulat

Question

Aria Acoustics, Inc. (AA), projects unit sales for new seven-octave voice emulation implant as following:

1 year 90.000

2 years 115,000

3 years 130,000

4 years 105,000

5 years 85,000

Production of the implants will require $1,800,000 in net working capital to start and addition net working capital investments each year equal to 15 percent of the projected states sales increase for the following year. Total fixed costs are $2,500.000 per year, variable production costs are $195 per unit, and the units are prices at $345 each. The equipment needed to begin production has an installed cost of $26,000,000. 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. AA1 is the 35 percent marginal tax bracket and has a required return on all its projects of 17 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?

Explanation / Answer

First we will calculate Cash inflows/(outflows): Present value of cashflows afer discounting by 17%

Machinery:    (26,000,000) (26,000,000)   

working capital:   (1,800,000)     (1,800,000)

Annual cash flows 1 year   7,150,000      6,111,111

Annual cash flows 2 year   9,587,500     7,003,799  

Annual cash flows 3 year   11,050,000      6,899,295

Annual cash flows 4 year   8,612,500      4,596,061

Annual cash flows 5 year   6,662,500      3,038,841

Working capital input in 2nd year   (1,293,750)   (1,771,014)

Working capital input in 3rd year    (776,250)   (1,243,252)

Residual value   5,200,000    2,371,778

Release of working capital   1,800,000   821,000  

Release of working capital   1,293,750    590,094

Release of working capital   776,250    354,056

After adding total cash flows NPV is 971,768

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.