Question 4. (chapter 9) Your company has been doing well, reaching $ 1.09 million in earnings,...
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Question 4. (chapter 9) Your company has been doing well, reaching $ 1.09 million in earnings, and is considering launching a new product. Designing the new product has already cost $ 522,000. The company estimates that it will sell 794,000 units per year for $2.95 per unit and variable non-labor costs will be $ 1.13 per unit. Production will end after year 3. New equipment costing $ 1.18 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 $ 294,000. The new product will require the working capital to increase to a level of $ 380,000 immediately, then to $ 407,000 in year 1, in year 2 the level will be $ 355,000, and finally in year 3 the level will return to $294,000. Your tax rate is 21 %. The discount rate for this project is 10.1 %. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Question 4. (chapter 9) Your company has been doing well, reaching $ 1.09 million in earnings, and is considering launching a new product. Designing the new product has already cost $ 522,000. The company estimates that it will sell 794,000 units per year for $2.95 per unit and variable non-labor costs will be $ 1.13 per unit. Production will end after year 3. New equipment costing $ 1.18 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 $ 294,000. The new product will require the working capital to increase to a level of $ 380,000 immediately, then to $ 407,000 in year 1, in year 2 the level will be $ 355,000, and finally in year 3 the level will return to $294,000. Your tax rate is 21 %. The discount rate for this project is 10.1 %. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1.
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