Aday Acoustics, Inc., projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 75,900 2 81,300 3 87,400 4 84,200 5 71,500 Production of the implants will require $1,530,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $4,050,000 per year, variable production costs are $148 per unit, and the units are priced at $330 each. The equipment needed to begin production has an installed cost of $19,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 15 percent of its acquisition cost. The company is in the 23 percent marginal tax bracket and has a required return on all its projects of 17 percent. MACRS schedule. What is the NPV of the project?What is the IRR of the project?

NPV is $9,751,118.63

IRR is 34.99232%.

Explanation:

Net Present Value is the discounted value of all the future cash flows which is used by the firms to decide whether or not they should decide to take on a project or not.

IRR or internal rate of return is the percentage rate that the project will create for the firm.

As per MARCS schedule depreciation rates on 7-year MARCS property are 14.29% for year 1, 24.49% for year 2, 17.49% for year 3, 12.49% for year 4 and 8.93% for year 5.

Compute the book value of asset after year 5 using the equation as shown below.

Book value = Initial cost - Depreciation of year 1 - Depreciation of year 2 - Depreciation of year 3 - Depreciation of year 4 - Depreciation of year 5

= $19,000,000 - $2,715,100 - $4,653,100 - $3,323,100 - $2,373,100 - $1,696,700

= $4,238,900

Hence, book value of the asset after 5 years is $4,238,900.

Compute tax saving on the loss of sale of asset using the equation as shown below.

Tax saving = (Book value - Salvage Value) * Tax rate  

                 = ($4,238,900 - $2,850,000) * 23%  

                 = $319,447

Hence, tax saving on the sale of asset is $319,447.

Prepare the table to compute NPV and IRR using MS-Excel as follows:

(image attached below of full calculations)

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