Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year 1 2 3 4 5 Unit Sales 100.000 125.000 135.000 145.000 95.000 Production of the implants will require $1,600,000 in net working capital to start and thereafter additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,100,000 per year, variable production costs are $270 per unit, and the units are priced at $400 each. The equipment needed to begin production has an installed cost of $32,000,000. This could be depreciated for tax purposes straight-line over 8 years. However, AAI expects to terminate the project at the end of five years and this equipment can be sold for about 40 percent of its acquisition cost. AAI is in the 25 percent marginal tax bracket and has a required return on all its projects of 10 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?
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Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year 1 2 3 4 5 Unit Sales 100.000 125.000 135.000 145.000 95.000 Production of the implants will require $1,600,000 in net working capital to start and thereafter additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,100,000 per year, variable production costs are $270 per unit, and the units are priced at $400 each. The equipment needed to begin production has an installed cost of $32,000,000. This could be
depreciated for tax purposes straight-line over 8 years. However, AAI expects to terminate the project at the end of five years and this equipment can be sold for about 40 percent of its acquisition cost. AAI is in the 25 percent marginal tax bracket and has a required return on all its projects of 10 percent. Based on these preliminary project estimates, what is the NPV of the project? What is theIRR ? Comment on the outcomes.
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