Question
Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production
Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space (Market Value Zero) in Sugar Land main plant. Total cost of the machine is $350,000. The machinery has an economic life of 4 years and will be depreciated using MACRS for 3-year property class. The machine will have a salvage value of $35,000 after 4 years. The new line will generate Sales of 1,750 units per year for 4 years and the variable cost per unit is $110 in the first year. Each unit can be sold for $210 in the first year. The sales price and variable cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by $30,000 at time zero (No change in NWC in years 1 through 3 and the NWC will be recouped in year 4). The firms tax rate is 40% and its weighted average cost of capital is 11%.
a. What are the annual depreciation expenses for years 1 through 4?
| Year 1 | Year 2 | Year 3 | Year 4 |
Depreciation |
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