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

Question

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

Production of the implants will require $1,670,000 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 $1,570,000 per year, variable production costs are $300 per unit, and the units are priced at $415 each. The equipment needed to begin production has an installed cost of $21,700,000. 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.)

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

Explanation / Answer

1) NPV of the project = $5179968 2) IRR of the project = 25.72% Calculations are given below: INITIAL INVESTMENT: cost of equipment 21700000 working capital 1670000 Initial cost 23370000 ANNUAL CASH FLOWS: 1 2 3 4 5 sales in units 88000 101000 115000 110000 91000 sales in $ (@ $415) 36520000 41915000 47725000 45650000 37765000 variable cost (@$300) 26400000 30300000 34500000 33000000 27300000 fixed costs 1570000 1570000 1570000 1570000 1570000 depreciation rate-% 14.286 24.490 17.493 12.495 8.925 depreciation 3100062 5314330 3795981 2711415 1936725 operating profit before tax 5449938 4730670 7859019 8368585 6958275 tax @ 30% 1634981 1419201 2357706 2510576 2087483 Operating profit after tax 3814957 3311469 5501313 5858010 4870793 add: depreciation 3100062 5314330 3795981 2711415 1936725 operating cash flows after tax 6915019 8625799 9297294 8569425 6807518 change in net working capital 539500 581000 -207500 -788500 0 release of net working capital 1794500 salvage value (15% of 21700000) 3255000 tax shield on loss on sale of equipment (4841487-3255000)*0.3 475946 Annual cash flows from the project: 7454519 9206799 9089794 7780925 12332964 NPV: annual cash flows from the project 7454519 9206799 9089794 7780925 12332964 pvif @ 17% 0.85470 0.73051 0.62437 0.53365 0.45611 PV @ 17% 6371383 6725691 5675400 4152291 5625202 PV of cash inflows of the project 28549968 Less: Initial cost 23370000 NPV 5179968 IRR: annual cash flows from the project 7454519 9206799 9089794 7780925 12332964 pvif @ 25% 0.80000 0.64000 0.51200 0.40960 0.32768 PV at 25% 5963615 5892351 4653975 3187067 4041266 23738273 pvif @ 26% 0.79365 0.62988 0.49991 0.39675 0.31488 PV at 26% 5916285 5799193 4544043 3087088 3883423 23230032 IRR lies between 25% and 26% Exact value of IRR = 25 + (23738273-23370000)/(23738273-23230032) 25.72 %

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