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 $1,610,000 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 $1,510,000 per year, variable production costs are $270 per unit, and the units are priced at $385 each. The equipment needed to begin production has an installed cost of $21,100,000. 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

Depreciation basis Year MACRS Rate Depreciation Book value $21,100,000 1 14.29% $3,015,190 $18,084,810 2 24.49% $5,167,390 $12,917,420 3 17.49% $3,690,390 $9,227,030 4 12.49% $2,635,390 $6,591,640 5 8.93% $1,884,230 $4,707,410 Salvage Value = 30% x $21,100,000 $6,330,000 Tax on sale on gain ($4,707,410 -$6,330,000)x 30% -$486,777 After tax salvage value $5,843,223 Year 1 2 3 4 5 Unit Sales 82000 95000 109000 104000 85000 Sales = Units x $385 $31,570,000 $36,575,000 $41,965,000 $40,040,000 $32,725,000 Less: Variable Cost = Units x $270 $22,140,000 $25,650,000 $29,430,000 $28,080,000 $22,950,000 Less: Fixed Cost $1,510,000 $1,510,000 $1,510,000 $1,510,000 $1,510,000 Less: Depreciation $3,015,190 $5,167,390 $3,690,390 $2,635,390 $1,884,230 EBIT $4,904,810 $4,247,610 $7,334,610 $7,814,610 $6,380,770 Less: Taxes @ 30% $1,471,443 $1,274,283 $2,200,383 $2,344,383 $1,914,231 Net income $3,433,367 $2,973,327 $5,134,227 $5,470,227 $4,466,539 Add: Depreciation $3,015,190 $5,167,390 $3,690,390 $2,635,390 $1,884,230 Operating Cash Flow $6,448,557 $8,140,717 $8,824,617 $8,105,617 $6,350,769 Net cash flows Operating Cash Flow $6,448,557 $8,140,717 $8,824,617 $8,105,617 $6,350,769 Change in NWC -$500,500 -$539,000 $192,500 $731,500 $623,000 Capital spending $5,843,223 Total Cash Flow $5,948,057 $7,601,717 $9,017,117 $8,837,117 $6,973,769 Increase in NWC for Year 1 = .10($31,570,000 – 36,575,000) -$500,500 -$539,000 $192,500 $731,500 $3,272,500 Increase in NWC -$500,500 -$539,000 $192,500 $731,500 $623,000 In Year 4, the NWC cash flow is positive since sales are declining. And, in Year 5, the NWC cash flow is the recovery of all NWC the company still has in the project. ($3272500-1,610,000-50500-539000) $623,000 NPV Year 0 1 2 3 4 5 Net Cash Flow -22710000 $5,948,057 $7,601,717 $9,017,117 $8,837,117 $6,973,769 PV @ 17% 1 0.8547 0.7305 0.6244 0.5337 0.4561 Present Value -22710000 $5,083,809 $5,553,157 $5,630,022 $4,715,928 $3,180,814 NPV $1,453,730.77 IRR 19.63%

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