Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 74,700 2345 2 80,100 3 85,800 4 5 83,000 69,900 Production of the implants will require $1,490,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $3,850,000 per year, variable production costs are $144 per unit, and the units are priced at $326 each. The equipment needed to begin production has an installed cost of $18,600,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. The tax rate is 24
Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 74,700 2345 2 80,100 3 85,800 4 5 83,000 69,900 Production of the implants will require $1,490,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $3,850,000 per year, variable production costs are $144 per unit, and the units are priced at $326 each. The equipment needed to begin production has an installed cost of $18,600,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. The tax rate is 24
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation
implant as follows:
Year
Unit Sales
1
74,700
80,100
2345
5
85,800
83,000
69,900
Production of the implants will require $1,490,000 in net working capital to start and
additional net working capital investments each year equal to 20 percent of the
projected sales increase for the following year. Total fixed costs are $3,850,000 per year,
variable production costs are $144 per unit, and the units are priced at $326 each. The
equipment needed to begin production has an installed cost of $18,600,000. Because
the implants are intended for professional singers, this equipment is considered
industrial machinery and thus qualifies as 7-year MACRS property. In five years, this
equipment can be sold for about 25 percent of its acquisition cost. The tax rate is 24
percent and the required return is 18 percent. (MACRS schedule)
a. What is the NPV of the project? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
b. 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.)
a. NPV
b. IRR
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