Question: Aria Acoustics, Inc., (AAI) projects unit sales for a new seven-octave voice emulation implant as follows:
| Year |
Unit Sales |
| 1 |
115,500 |
| 2 |
134,500 |
| 3 |
122,500 |
| 4 |
105,500 |
| 5 |
91,500 |
|
Production of the implants will require $1,650,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,500,000 per year, variable production costs are $240 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $30,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS (MACRS Table) property. In five years, this equipment can be sold for about 10 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 15 percent.