Magnolia Acoustics, Inc. (MAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales
0 - 0
1 - 83,000
2 - 92,000
3 - 104,000
4 - 98,000
5 - 84,000
Production of the implants will require an investment of $1,500,000 in net working capital to start the project.
Additional net working capital investments each year (starting in year 1) equal to 15% of the projected sales increase for the following year. Decreases in sales will result in recovery of net working capital to equal 15% of the projected sales decrease for the following year.
All net working capital investments will be recovered after the final year of the project.
Total fixed costs are $2,400,000 per year, variable production costs are $190 per unit, and the units are priced at $345 each.
The equipment needed to begin production has an installed cost of $23,000,000. This equipment is considered industrial machinery and thus qualifies as seven-year MACRS property.
MACRS for 7 years Yr - %
1 - 14.29%
2- 24.49%
3- 17.49%
4- 12.49%
5- 8.93%
6 - 8.92%
7- 8.93%
8- 4.46%
In five years, this equipment will be sold for an estimated 20% of its acquisition cost.
MAI is in the 35% marginal tax bracket and has a required return on all its projects of 18%.
Based on these preliminary project estimates, what is the NPV of the project? What is the Project Free Cash Flow?