Question 1 (of 1, Save&Exit; Submt 10.00 points Aria Acoustics, Inc., (AAI) proj

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Question 1 (of 1, Save&Exit; Submt 10.00 points Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows 117,500 136.500 107 500 93.500 Production of the implants will require $1,690,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projecte sales increase for the following year. Total fixed costs are $1,540,000 per year, variable production costs are $244 per unit, and the units are priced at $364 each. The equipmer needed to begin production has an installed cost of $32,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS (MACRS Table) property. In five years, this equipment can be sold for about 10 percent of its acquisition cost. AAl is in the 30 percent marginal tax bracket and has a required return on all its projects of 15 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value What is the IRR of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) Internal rate of return References eBook & Resources Worksheet Learning Objective: 09-02 Analyze a projects projected cash ows Difficulty: 3 Challenge Section:9.4 More on Project Cash Flow

Explanation / Answer

So, the cash flows during the life of project can be calculated as:

Year 0: -32500000-1690000

= -34190000

Year 1: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 1: = (117500*364 - 117500*244 - 1540000 - 0.1429*32500000)*(1-0.3) + 0.1429*32500000 - 0.1*(136500-117500)*364

= 9493675

Year 2: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 2: = (136500*364 - 136500*244 - 1540000 - 0.2449*32500000)*(1-0.3) + 0.2449*32500000 - 0.1*(124500-136500)*364

= 13212575

Year 3: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 3: = (124500*364 - 124500*244 - 1540000 - 0.1749*33500000)*(1-0.3) + 0.1749*33500000 - 0.1*(107500-124500)*364

= 11756545

Year 4: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC

Year 4: = (107500*364 - 107500*244- 1540000 - 0.1249*32500000)*(1-0.3) + 0.1249*32500000 - 0.1*(93500-107500)*364

= 9679375

Year 5: (Sales - variable cost - fixed cost - depreciation)*(1-tax rate) + depreciation + change in WC + After tax salvage value + release of initial working capital

Year 5: = (93500*364 - 93500*244 - 1540000 - 0.0893*32500000)*(1-0.3) + 0.0893*32500000 - 0.1*(0-93500)*364 + (32500000*0.1 - (0.3*(32500000*0.1-32500000*(0.0892+0.0446))) + 1690000

= 16319625

So, NPV = -34190000 + 9493675/1.15 + 13212575/1.15^2 + 11756545/1.15^3 + 9679375/1.15^4 + 16319625/1.15^5

= 5434045.61

IRR can be calculated in excel as = IRR(series of cash flows)

= 21.16%

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