Reference no: EM132571076

We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows:

Year Unit Sales

1 96,500

2 108,500

3 131,500

4 137,500

5 90,500

• The new system will be priced to sell at $430 each.
• The cockroach eradicator project will require $2,100,000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $300, and total fixed costs are $1,600,000 per year. The equipment necessary to begin production will cost a total of $18 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost.
• The relevant tax rate is 35%, and the required return is 14%. Based on these preliminary estimates, what is the NPV of the project?

Question 1: What is the NPV?

Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:

Year        Unit Sales

1                101,000

2                 115,000

3                  125,000

4                    145,000

5                      90,000

Production of the implants will require $753,000 in net working capital to start and additional net working capital investments each year equal to 15% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWC cash flow occurring for Year 4.) Total fixed costs are $177,000 per year, variable production costs are $309 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $10.0 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20%). In five years, this equipment can be sold for about 20% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 18%.

Question 1: Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?