(Questions 29-30) LO2 29. Project Evaluation Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 71,500 2 87,800 3 104,300 4 89,200 5 75,300 Production of the implants will require $1.5 million 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 $2.15 million per year, variable production costs are $230 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of $20.5 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI has a 21 percent tax rate and a required return on all its projects of 15 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? LO2 30. Calculating Required Savings A proposed cost-saving device has an installed cost of $565,000. The device will be used in a five- year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $40,000, the tax rate is 23 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of $55,000. What level of pretax cost savings do we require for this project to be profitable?
(Questions 29-30) LO2 29. Project Evaluation Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 71,500 2 87,800 3 104,300 4 89,200 5 75,300 Production of the implants will require $1.5 million 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 $2.15 million per year, variable production costs are $230 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of $20.5 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI has a 21 percent tax rate and a required return on all its projects of 15 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? LO2 30. Calculating Required Savings A proposed cost-saving device has an installed cost of $565,000. The device will be used in a five- year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $40,000, the tax rate is 23 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of $55,000. What level of pretax cost savings do we require for this project to be profitable?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 19P
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Page 308
(Questions 29-30)
LO2 29.
Project Evaluation
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year
Unit Sales
1
71,500
87,800
3
104,300
4
89,200
5
75,300
Production of the implants will require $1.5 million 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 $2.15 million per year,
variable production costs are $230 per unit, and the units are priced at $375 each. The equipment needed to begin production has
an installed cost of $20.5 million. Because the implants are intended for professional singers, this equipment is considered
industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20
percent of its acquisition cost. AAI has a 21 percent tax rate and a required return on all its projects of 15 percent. Based on these
preliminary project estimates, what is the NPV of the project? What is the IRR?
LO2 30.
Calculating Required Savings A proposed cost-saving device has an installed cost of $565,000. The device will be used in a five-
year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is
$40,000, the tax rate is 23 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of
$55,000. What level of pretax cost savings do we require for this project to be profitable?
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