Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as...
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Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales
1 73,000
2 86,000
3 105,000
4 97,000
5 67,000
Additional information:
The equipment needed to begin production has an installed cost of $16,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property (depreciation rates 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).
Total fixed costs are $3,200,000 per year, variable production costs are $265 per unit, and the units are priced at $375 each.
Instructions:
Complete the proforma and determine total cash flows for each year of projects life. Would you recommend to accept or reject the project? Explain your decision.
Production of the implants will immediately require an investment of $3,500,000 in net working capital that will be recovered in the end of the project.
In five years, this equipment can be sold for about 20 percent of its acquisition cost.
The tax rate is 21 percent and the required return is 18 percent.
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