Example 3 Fix rate 34% Cost of new plant and equipment: $9,700,000 Shipping and installation costs: 300,000 Unit Sales: Year Units Sold 2 3 4 5 50,000 100,000 100,000 70,000 50,000 Sales price per Unit: $150fanit in years 1-4, $130/unit in year 5 Variable cost per unit: $80/unit Annual fixed costs: $500,000 Working capital requirements: There will be an initial working capital requirement of $100,00 just to get production started. Then, for each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capita is liquidated at the termination of the project at the end of year 5. The depreciation method: We use the simplified straight-line method over 5 years. It is assumed that the plant and equipment wil have no salvage value after 5years. Thus, anqual depreciasion $2,000,000/year for 5 years. Example 3 Fix rate 34% Cost of new plant and equipment: $9,700,000 Shipping and installation costs: 300,000 Unit Sales: Year Units Sold 2 3 4 5 50,000 100,000 100,000 70,000 50,000 Sales price per Unit: $150fanit in years 1-4, $130/unit in year 5 Variable cost per unit: $80/unit Annual fixed costs: $500,000 Working capital requirements: There will be an initial working capital requirement of $100,00 just to get production started. Then, for each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capita is liquidated at the termination of the project at the end of year 5. The depreciation method: We use the simplified straight-line method over 5 years. It is assumed that the plant and equipment wil have no salvage value after 5years. Thus, anqual depreciasion $2,000,000/year for 5 years