ria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emul
ID: 2713095 • Letter: R
Question
ria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales
1 75,000
2 88,000
3 102,000
4 97,000
5 78,000
Production of the implants will require $1,540,000 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 $1,440,000 per year, variable production costs are $235 per unit, and the units are priced at $350 each. The equipment needed to begin production has an installed cost of $20,400,000. 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. MACRS schedule
What is the NPV of the project? (Do not round intermediate calculations and round your 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.)
Explanation / Answer
a)
b)
Time line 0 1 2 3 4 5 Cost of equipment -20400000 Installation cost 0 Total investment in new machine -20400000 Net working capital -1540000 =Initial Investment outlay -21940000 addntl working cap -455000 -490000 175000 665000 Sales Sales* selling price 26250000 30800000 35700000 33950000 27300000 Gross profit= sales*( selling price - variable cost) 8625000 10120000 11730000 11155000 8970000 MACR rate 14.29% 24.49% 17.49% 12.49% 8.93% 22.31% -Depreciation MACR Rate* total investment -2915160 -4995960 -3567960 -2547960 -1821720 4551240 =Salvage value = 5709840 5124040 8162040 8607040 7148280 -taxes =(savings- depreciation)*(1-tax) 3996888 3586828 5713428 6024928 5003796 +Depreciation 2915160 4995960 3567960 2547960 1821720 =after tax operating cash flow 6912048 8582788 9281388 8572888 6825516 Reversal of Net working capital 1645000 Proceeds from sale of assets =selling price*(1 - tax rate) 2142000 +Salvage book value * tax rate 1365372 Terminal year non operating cash flows 5152372 Total Cash flow for the period -21940000 6912048 8582788 9281388 8572888 11977888 Discount factor =(1+discount rate)^n 1 1.17 1.3689 1.601613 1.873887 2.192448 Discount rate= 17% Discounted cash flows -21940000 5907733 6269843 5795025 4574922 5463248 NPV= Sum of discounted cash flows 6070772.1Related Questions
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