Question: C-U Acoustics, Inc. is considering a new voice emulation implant. The proposed project would require the following: ? Production of the implants will require $1,500,000 in net working capital to start; additional net working capital investments each year for year 1 to year 4 is equal to 15% of the projected sales increase for the following year; and the net working capital will be fully recovered at the end of the 5-year project. (Hint: when sales increase is "+", change in net working capital should be "-".) ? Total fixed costs are $1,850,000 / year, variable production costs are $190 / unit, and the units are priced at $345 / unit. ? The equipment needed to begin production has an installed cost of $19,500,000 and qualifies as 7-year MACRS property. In 5 years, the equipment can be sold for 20% of its acquisition cost. ? Projected unit sales for the implant for year 1 to year 5 are 81,000, 89,000, 97,000, 92,000 and 77,000 respectively. ? The company is in the 35% marginal tax bracket; and has a required return on all its projects of 18%
1) What is the after-tax salvage value of the equipment at the end of the project's life?
2) Calculate the operating cash flow for the project in each of the next five years.
3) Calculate the NPV and IRR for the project. Should the company accept the project?
4) C-U Acoustics, Inc. estimates that launching this new implant will reduce the incremental after-tax cash flows of the firm's existing implants by $1,000,000 / year for the next five years. How does this new assumption affect your answers to part (3)?