Pavarotti-in-you (PIY) Inc. projects unit sales for a new opera tenor emulation implant as follows:,,Unit sales per year,year 1 – $ 90,000 ,year 2 – $ 100,000,year 3 – $ 110,000,year 4 – $ 117,000,year 5 – $ 65,000,production of the implants willl require $10 million in net working capital to start and additional net working capital investment each year equal to 35% of the projected sales increase( in $’s) for the following year. ( because sales are expected to fall in the fifth year of sales, there is no NWC for that year). Total fixed costs are $ 175,000 per year, variable production costs are $227 per unit, and the units are priced at $360 each. The equipmnet needed to begin production is $ 13.2 million. Because the implants are intended for professional singers this equipment is considered industrial machinery and thus falls into class 8 for tax purposes (20%)as well, 6 million of the equipment is eligible for a 5% investment tax credit. Assume at the end of year 5 this equipment can be sold for its scrap value of $1 million. To promote the Arts,the government is offering a non-taxable cash grant of $500,000 payable a year aftter the project has been started. PIY is in the 40% marginal tax bracket and has a return on all its projects of 25%. ,,1. Based on these preliminary project estimates, what is the NPV of the project?,,2. Calaculate the projects IRR.,,3. Based on this analysis, What would be your recommendation for PIY?
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