Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows: Year
Question:
Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales
1 110,000
2 129,000
3 117,000
4 100,000
5 86,000
Production of the implants will require $1,540,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,390,000 per year, variable production costs are $229 per unit, and the units are priced at $349 each.
The equipment needed to begin production has an installed cost of $25,000,000. 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 20 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. What is the NPV of the project?
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe