Telefonica USA plans to launch a new smart phone for the U.S. market. The new phone will sell for $350 per unit to start with (the first 2 years). The company believes that after 2 years (starting in year 3) they will need to lower the price to $325 in year 3 and $300 in year 4 to be competitive. Units sales for years 1-4 are 3,500: 3.100. 2,600, and 2,100 The smart phone projest will require $20,000 in net working capital each year in years 0-1 ($40,000 total). In year 4, $40,000 of net working capital is recovered. The variable cost per unit is $225 and total fixed costs are $150,000 per year. It will cost $400,000 to design and build the new assembly area for the phone's production. The new assembly line qualifies for 3 year MACRS depreciation. The assembly line can be sold at the end of the project (year 4) for $75,000. The relevant tax rate is 40% Unit Sales Year Unit Sales Sales Price 1 3,500 $350 2 3,100 $350 3 2,600 $325 4 2,100 $300 Depreciation Schedule Year 1 1 2 3 Depreciation % .3333 4445 .1481 3,500 Unit Sales Sales Price $350 Depreciation Schedule 3,100 $350 2,600 $325 2.100 $300 Year 1 2 3 Depreciation % .3333 4445 .1481 .0741 What is the depreciation expense in year 2? $88,880 $266,680 $177,800 $133,320