Question is only regarding PART B

a.Manufacturing, Inc.projects unit sales for a new hearing aid implant as follows:

YearUnit Sales

173,000

286,000

3105,000

497,000

567,000

Productionfor the implants will require $1,500,000 in net working capital to start and additional working capital investment each year equal to 15 percent of the projected increase in sales for the following year. All NWC investment would be recovered at the end of the project.Total fixed costs are $3,200,000 per year, variable production costs are $255 per unit, and the units are priced at $385 each.Equipment needed to begin production has an installed cost of $16,500,000.This equipment qualifies as seven-year MACRS property,In five years, this equipment can be sold for 20% of acquisition cost.The tax rate is 21 percent and the required return on this all-equity financed project is 18 percent.Based on these preliminary project estimates, what is the net present value of the project?Its IRR? (15 points)

b.Management has never used debt to finance a project, but thought that with the hearing aid project, perhaps they should consider debt.After negotiating with the local bank, they have a promise from the bank to lend them money to acquire the production equipment.The loan would carry arate of 8 percent (APR), would mature in 5 years with interest only annual payments and a balloon principal payment at the end of year five.How would using debt to finance part of the project change the economics of this project? (15 points)