Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year Unit Sales 1 109,000 2 125,000 3 136,000 4 158,000 5 97,000 Production of the implants will require $812,000 in net working capital to start and additional net working capital investments each year equal to 20% 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 $194,000 per year, variable production costs are $290 per unit, and the units are priced at $400 each. The equipment needed to begin production has an installed cost of $21.5 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 25% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 25%.
Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:
| Year | Unit Sales |
| 1 | 109,000 |
| 2 | 125,000 |
| 3 | 136,000 |
| 4 | 158,000 |
| 5 | 97,000 |
Production of the implants will require $812,000 in net working capital to start and additional net working capital investments each year equal to 20% 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 $194,000 per year, variable production costs are $290 per unit, and the units are priced at $400 each. The equipment needed to begin production has an installed cost of $21.5 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 25% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 25%.
Based on these preliminary project estimates, what is the
Step by step
Solved in 4 steps with 4 images
