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

Year Unit Sales

1 72,000

2 85,000

3 99,000

4 94,000

5 75,000

Production of the implants will require $1,510,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $1,410,000 per year, variable production costs are $220 per unit, and the units are priced at $335 each. The equipment needed to begin production has an installed cost of $20,100,000. 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 15 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 17 percent.

TABLE 8.3 Depreciation under Modified RECOVERY PERIOD CLASS Accelerated Cost Recovery YEAR 3 YEARS 5 YEARS 7 YEARS 10 YEARS 15 YEARS 20 YEARS System (MACRS) 3333 2000 1429 .1000 .0500 .03750 4445 3200 2449 . 1800 .0950 07219 .1481 .1920 1749 .1440 0855 .06677 0741 .1152 1249 1152 .0770 06177 .1152 0893 0922 .0693 .05713 .0576 0892 0737 .0623 05285 0893 0655 .0590 04888 0446 0655 0590 04522 50 0 - 0) 01 .0656 .0591 .04462 .0655 .0590 04461 0328 .0591 04462 .0590 04461 13 .0591 04462 14 .0590 04461 15 .0591 04462 16 .0295 04461 17 04462 18 04461 19 04462 20 04461 21 .02231 Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Property and other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six years because the IRS assumes purchase is made in midyear