Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Year	Unit Sales
1	105,000
2	227,000
3	125,000
4	108,000
5	94,000

Total fixed costs are $1,500,000 per year, variable production costs are 80% of sales revenues, and the units are priced at $345 each.

The equipment needed to begin production has an installed cost of $25,000,000.Because the implants are intended for professional singers, 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.AAI is in the 35 percent marginal tax bracket.Also, assume that the firm must make a $5 million investment at the beginning of the project (period 0) and will recover the working capital once the project ends.

Construct a pro-forma income statement to estimate operating cash flows over the life of the project.

Below is information the firm's capital structure.Use the information given to compute the weighted average cost of capital.Do this in the same spreadsheet that you computed the operating cash flows.

Book Value of Debt	$1,500,000,000
Market Value of Debt	$2,750,000,000
Book Value of Equity	$1,500,000,000
Market Value of Equity	$3,750,000,000
Beta	1.25
Risk free rate	5.25%
Expected return on the market	14.25%
YTM on AAI's debt	8.75%
Tax rate	35%

a.Using the information from the previous parts of this assignment, compute the NPV and IRR for this project.

b.Find the NPV and IRR if AAI can only sell the product for $325.

• c.Find the NPV and IRR if the variable costs fall to 78% and price is $345.