Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emu
ID: 2640953 • 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 $1,700,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,600,000 per year, variable production costs are $315 per unit, and the units are priced at $430 each. The equipment needed to begin production has an installed cost of $22,000,000. 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 15 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 17 percent. Table 8.3.
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. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Explanation / Answer
Initial Cost of Investment= $22,000,000
Additional working capital= $ 1,700,000
Tota cost out flow= $ 23,7000,000
Calculation of NPV Years Particulars 1 2 3 4 5 Total Units Sales 91000 104000 118000 113000 94000 Sales Revenue @ $430 $ 39,130,000 $ 44,720,000 $ 50,740,000 $ 48,590,000 $ 40,420,000 Variable cost @ $315 $ (28,665,000) $ (32,760,000) $ (37,170,000) $ (35,595,000) $ (29,610,000) Fixed costs $ (1,600,000) $ (1,600,000) $ (1,600,000) $ (1,600,000) $ (1,600,000) Additional expense ** (W1) $ (4,472,000) $ (5,074,000) $ (4,859,000) $ (4,042,000) $ - Depreciation ** (W2) $ (3,740,000) $ (3,740,000) $ (3,740,000) $ (3,740,000) $ (3,740,000) Earnings before taxes $ 653,000 $ 1,546,000 $ 3,371,000 $ 3,613,000 $ 5,470,000 Taxes @ 30% $ (195,900) $ (463,800) $ (1,011,300) $ (1,083,900) $ (1,641,000) Earnings after Tax $ 457,100 $ 1,082,200 $ 2,359,700 $ 2,529,100 $ 3,829,000 Add: Depreciation $ 3,740,000 $ 3,740,000 $ 3,740,000 $ 3,740,000 $ 3,740,000 Cash flow after tax (CFAT) $ 4,197,100 $ 4,822,200 $ 6,099,700 $ 6,269,100 $ 7,569,000 PV Factor @ 17% 0.855 0.731 0.624 0.534 0.456 PV of CFAT @ 17% $ 3,588,520.50 $ 3,525,028.20 $ 3,806,212.80 $ 3,347,699.40 $ 3,451,464.00 $ 17,718,925 Initial Cash outflow $ 23,700,000 NPV @ 17% $ (5,981,075) PV Factor @ 6% 0.943 0.89 0.84 0.792 0.747 PV of CFAT @ 6% $ 3,957,865 $ 4,291,758 $ 5,123,748 $ 4,965,127 $ 5,654,043 $ 23,992,542 Initial Cash outflow $ 23,700,000 NPV @ 6% $ 292,542 IRR Calculation may be done as follows: At 17%, NPV is = $ (5,981,075) At 6% NPV is = $ 292,542 Interpolating between 6% and 17% IRR= 6%+ $292,542 `* (17%- 6%) $292,542- ($- 5,981,075)) IRR = 6.51% Workings W1 Additonal WC 10% of projected sales increase for the following year W2 Calculation of Depreciation Cost of EQUIPMENT $ 22,000,000 Salvage Value $ 3,300,000 (15% of acquisition cost) Value for depreciation= $ 18,700,000 Depreciation following SLM dep method= $18,7000,000/5= $ 3,740,000Related Questions
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