Advoco reached $1 million in earnings and is considering 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 variable non-labor costs will be $1 per unit. Production will end after year 3.

New equipment costing $1 million will be required. The equipment will be depreciated to zero using 7-year MACRS schedule. Advoco plans to sell the equipment for book value at the end of year 3.

Advocos 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.

The tax rate is 35% and the discount rate for this project is 10%. Do the capital budgeting analysis for this project and calculate its NPV.

MACRS

YEAR 3 YEARS 5 YEARS 7 YEARS 10 YEARS 15 YEARS 20 YEARS 1 33.33% 20% 14.29% 10% 5% 3.750% 2 44.45% 32% 24.49% 18% 9.50% 7.219% 3 14.81% 19.20% 17.49% 14.40% 8.55% 6.677% 4 7.41% 11.52% 12.49% 11.52% 7.70% 6.177% 5 11.52% 8.93% 9.22% 6.93% 5.713% 6 5.76% 8.92% 7.37% 6.23% 5.285% 7 8.93% 6.55% 5.90% 4.888% 8 4.46% 6.55% 5.90% 4.522% 9 6.56% 5.91% 4.462% 10 6.55% 5.90% 4.461% 11 3.28% 5.91% 4.462% 12 5.90% 4.461% 13 5.91% 4.462% 14 5.90% 4.461% 15 5.91% 4.462% 16 2.95% 4.461% 17 4.462% 18 4.461% 19 4.462% 20 4.461% 21 2.231% YEAR 3 YEARS 5 YEARS 7 YEARS 10 YEARS 15 YEARS 20 YEARS 1 33.33% 20% 14.29% 10% 5% 3.750% 2 44.45% 32% 24.49% 18% 9.50% 7.219% 3 14.81% 19.20% 17.49% 14.40% 8.55% 6.677% 4 7.41% 11.52% 12.49% 11.52% 7.70% 6.177% 5 11.52% 8.93% 9.22% 6.93% 5.713% 6 5.76% 8.92% 7.37% 6.23% 5.285% 7 8.93% 6.55% 5.90% 4.888% 8 4.46% 6.55% 5.90% 4.522% 9 6.56% 5.91% 4.462% 10 6.55% 5.90% 4.461% 11 3.28% 5.91% 4.462% 12 5.90% 4.461% 13 5.91% 4.462% 14 5.90% 4.461% 15 5.91% 4.462% 16 2.95% 4.461% 17 4.462% 18 4.461% 19 4.462% 20 4.461% 21 2.231%