Project Evaluation. 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?