December 20, 2014

Homework Help: Finance

Posted by Brandon on Sunday, January 2, 2011 at 1:54pm.

I've solved every problem in my assignment except for two. I only need one more to get the grade I'd like/need. I've been doing this one over and over, consistently getting wrong answers. I know the process of how to do it generally, but I feel I make mistakes in calculating either depreciation or changes in net working capital. Here's the problem:

Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Year Unit Sales
1 74,800
2 86,240
3 93,280
4 100,320
5 81,840

Production of the implants will require $1,320,000 in net working capital to start and additional net working capital investments each year equal to 19 percent of the projected sales increase for the following year. Total fixed costs are $792,000 per year, variable production costs are $211 per unit, and the units are priced at $286 each.

The equipment needed to begin production has an installed cost of $18,480,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property (MACRS Table). In five years, this equipment can be sold for about 17 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 17 percent.

What is the NPV of the project?
What is the IRR of the project?

Thanks for any and all help!

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