25. Your company has been doing well, reaching $1 million in earnings, and is consider- ing launching
Question:
25. Your company has been doing well, reaching $1 million in earnings, and is consider- ing launching a new product. Designing the new product has already cost $500,000. The company estimates that it will sell 800,000 units per year for $3 per unit and vari- able non-labor costs will be $1 per unit. Production will end after year 3. New equip- ment costing $1 million will be required. The equipment will be depreciated to zero using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of working capital is $300,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $400,000 in year 1, in year 2 the level will be $350,000, and finally in year 3 the level will return to $300,000. Your tax rate is 35%. The discount rate for this project is 10%. Do the capital budgeting analysis for this project and calculate its NPV.
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781292018409
3rd Global Edition
Authors: Berk, Peter DeMarzo, Jarrad Harford