Your company has been doing well, reaching

$1

million in earnings, and is considering launching a new product. Designing the new product has already cost

$500,000.

The company estimates that it will sell

800,000

units per year for

$3.00

per unit and variable non-labor costs will be

$1.00

per unit. Production will end after year

3.

New equipment costing

$1

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

$300,000.

The new product will require the working capital to increase to a level of

$380,000

immediately, then to

$400,000

in year 1, in year 2 the level will be

$350,000,

and finally in year 3 the level will return to

$300,000.

Your tax rate is

21%.

The discount rate for this project is

10%.

Do the capital budgeting analysis for this project and calculate its NPV.

Note:

Assume that the equipment is put into use in year 1.