Solomons Electronics Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by , a recently graduated BBA.

The production line would be set up in unused space in Solomons' main plant. The machinerys invoice price would be approximately $190,000, another $12,000 in shipping charges would be required, and it would cost an additional $25,000 to install the equipment. The machinery has an economic life of 4 years, and Solomons has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $30,000 after 4 years of use.

The new line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $120 per unit in the first year, excluding depreciation. Each unit can be sold for $205 in the first year. The sales price and cost are both expected to increase by 4% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 13% of sales revenues. The firms tax rate is 35%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 12%.

Part I: Input Data Key Output: NPV = $0 Equipment cost Shipping charge Installation charge Economic Life Salvage Value Tax Rate Cost of Capital Units Sold Sales Price Per Unit Incremental Cost Per Unit NWC/Sales Inflation rate b. Disregard the assumptions in Part a. What is Solomons' depreciable basis? What are the annual depreciation expenses? Annual Depreciation Expense Depreciable Basis - Kemaini ng Book X Basis = Depr. Value Year 1 2 3 4 % 0.3333 0.4445 0.1481 0.0741