Question

Samsung Inc. estimate unit sales for a new music amplifier as follows: 75,000; 86,000; 95,000; 92,000; and 73,000 for year 1 through year 5, respectively.

Production of the implants will require $1,600,000 in net working capital to start and additional net working capital investments each year equal to 18 percent of the projected sales increase for the following year. Total fixed costs are $1,800,000 per year, variable production costs are $250 per unit, and the units are priced at $340 each. The equipment needed to begin production has an installed cost of $16,200,000. This equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The firm is in the 37 percent marginal tax bracket and has a required return on all its projects of 16 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?

Answer 1

Year	Sales units	Sale price per unit	total sales	Fixed costs	Var costs per unit	total variable cost	machinery cost	working cap	gross earnings	tax
1	75000	340	25500000	1800000	250	18750000	2592000	1600000	758000	280460
2	86000	340	29240000	1800000	250	21500000	2592000	5263200	-1915200	0
3	95000	340	32300000	1800000	250	23750000	2592000	5814000	-1656000	0
4	92000	340	31280000	1800000	250	23000000	2592000	5630400	-1742400	0
5	73000	340	24820000	1800000	250	18250000	2592000	4467600	-2289600	0

npv	₹ -38,83,206.79