Alpha Acoustics Ltd (AAL) projects unit sales for a new se
admin / July 3, 2018
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Alpha Acoustics Ltd (AAL) projects unit sales for a new seven-octave voice emulation implant as follows:
Production of the implants will require $1 500 000 in net working capital to start and additional net working capital investment each year equal to 15% of
the projected sales increase for the following year. Total fixed costs are $850 000 per year variable production costs are $240 per unit and the units
are priced to sell at $340 each. The equipment needed to begin production has an installed cost of $22 000 000. Because the implants are intended for
professional singers this equipment is considered industrial machinery and therefore qualifies as a seven-year life even though management has decided to
look at a five-year time frame because of future developments in voice emulation implants. AAL projects that in five years the equipment can be sold for
about 20% of its acquisition cost. AAL pays tax at the 30% company tax rate and has a required rate of return on all its projects of 18%. Based on these
preliminary project estimates what is the NPV of the project? What is the IRR?
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