Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year 1 3 4 Unit Sales 101, 000 115,000 125,000 145,000 90,000 Production of the implants will require $753,000 in net working capital to start and additional net working capital investments each year equal to 15% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWO cash flow occurring for Year 4.) Total fixed costs are $177,000 per year, variable production costs are $309 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $10.0 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 20% of its acquisition cost. AlY is in the 40% marginal tax bracket and has a required return on all its projects of 18%. NPV IRR 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.)
Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year 1 3 4 Unit Sales 101, 000 115,000 125,000 145,000 90,000 Production of the implants will require $753,000 in net working capital to start and additional net working capital investments each year equal to 15% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWO cash flow occurring for Year 4.) Total fixed costs are $177,000 per year, variable production costs are $309 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $10.0 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 20% of its acquisition cost. AlY is in the 40% marginal tax bracket and has a required return on all its projects of 18%. NPV IRR 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.)
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 15P
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T8.
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Transcribed Image Text:Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:
Year
1
3
5
NPV
IRR
Unit Sales
101, 000
115,000
125,000
145,000
90, 000
Production of the implants will require $753,000 in net working capital to start and additional net working capital investments each
year equal to 15% 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 $177,000 per year, variable production costs are $309 per unit, and the units are
priced at $360 each. The equipment needed to begin production has an installed cost of $10.0 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 20% of its acquisition cost. AlY is in the 40% marginal tax bracket and has a
required return on all its projects of 18%.
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.)
$
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