Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year 1 Unit Sales 102,000 2 116,000 3 126,000 4 5 146,000 91,000 Production of the implants will require $761,000 in net working capital to start and additional net working capital investments each year equal to 25% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWC cash flow occurring for Year 4.) Total fixed costs are $178,000 per year, variable production costs are $306 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $11.0 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20%). In five years, this equipment can be sold for about 30% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 19%. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? (Enter your answer in dollars, not in
Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year 1 Unit Sales 102,000 2 116,000 3 126,000 4 5 146,000 91,000 Production of the implants will require $761,000 in net working capital to start and additional net working capital investments each year equal to 25% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWC cash flow occurring for Year 4.) Total fixed costs are $178,000 per year, variable production costs are $306 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $11.0 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20%). In five years, this equipment can be sold for about 30% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 19%. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? (Enter your answer in dollars, not in
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:Problem 10-50 Project Evaluation (LO2)
Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:
Year
Unit Sales
102,000
12345
116,000
126,000
146,000
91,000
Production of the implants will require $761,000 in net working capital to start and additional net working capital investments each
year equal to 25% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWC
cash flow occurring for Year 4.) Total fixed costs are $178,000 per year, variable production costs are $306 per unit, and the units are
priced at $360 each. The equipment needed to begin production has an installed cost of $11.0 million. Because the implants are
intended for professional singers, this equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20%).
In five years, this equipment can be sold for about 30% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required
return on all its projects of 19%.
Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? (Enter your answer in dollars, not in
millions of dollars, i.e. 1,234,567. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit
$ sign in your response.)
NPV
IRR
%
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