Year 0,1,2,3
Your company has been doing well, reaching $1.06 million in earnings, and is considering launching a new product. Designing the new product has already cost $457,000. The company estimates that it will sell 774,000 units per year for $3.02 per unit and variable non-labor costs will be 1.12 per unit. Production will end after year 3. New equipment costing $1.02 million will be required. The equipment will be depreciated using 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $310,000. The new product will require the working capital to increase to a level of $371,000 immediately, then to $397,000 in year 1, in year 2 the level will be $348,000, and finally in year 3 the level will return to $310,000. Your tax rate is 21%. The discount rate for this project is 9.9%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. C. Design already happened and is sunk (irrelevant). (Select from the drop-down menu.) According to the bonus depreciation schedule, depreciation in year 1 will be $ 1020000. (Round to the nearest dollar.) Depreciation in years 2 and 3 will be $ 0. (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Sales - Cost of Goods Sold $ 0 Gross Profit $ 0 0 Depreciation EBIT $ $ 0 - Tax Incremental Earnings Your company has been doing well, reaching $1.06 million in earnings, and is considering launching a new product. Designing the new product has already cost $457,000. The company estimates that it will sell 774,000 units per year for $3.02 per unit and variable non-labor costs will be $1.12 per unit. Production will end after year 3. New equipment costing $1.02 million will be required. The equipment will be depreciated using 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $310,000. The new product will require the working capital to increase to a level of $371,000 immediately, then to $397,000 in year 1, in year 2 the level will be $348,000, and finally in year 3 the level will return to $310,000. Your tax rate is 21%. The discount rate for this project is 9.9%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. According to the bonus depreciation schedule, depreciation in year 1 will be $ 1020000. (Round to the nearest dollar.) Depreciation in years 2 and 3 will be $ 0. (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Sales $ $ $ $ $ - Cost of Goods Sold Gross Profit - Depreciation EBIT 0 0 CA 0 - Tax Incremental Earnings + Depreciation - Incremental Working Capital - Capital Investment Incremental Free Cash Flow $ $ $ 0 FA $
