Reference no: EM13950032

Wilson Sound Inc. has developed a new home entertainment product Real Sound Units which enhances the sound of DVDs for high-end home entertainment systems. They project sales over the five years of project to be as follows: Year Unit Sales 1 85,000 2 98,000 3 106,000 4 114,000 5 93,000 Production of the units will require a $1,500,000 initial investment in net working capital and subsequent investment in net working capital will be equal to 15% of the net increase in next year’s projected sales. Total project related annual fixed costs are $900,000, and allocated overhead will be 3% of sales, although there will be no new actual overhead costs beyond the $900,000 above. Cost of production will be $240 per unit and the Sales Price per unit will be $325. The feasibility study for the project was completed last month and cost $300,000. The project will require the investment of $21,000,000 in manufacturing equipment which must be purchased before production can begin. This equipment must be depreciated using the seven year MACRS schedule. Wilson believes that they will be able to sell this equipment for 20% of its acquisition cost at the end of the 5th year. Wilson has an 18% cost of capital and faces an average tax rate of 30% and a marginal tax rate of 35%. Calculate the NPV of this project.