Question
Your company has been doing well, reaching $ 1.07 million in earnings, and is considering launching a new product. Designing the new product has already
Your company has been doing well, reaching $ 1.07 million in earnings, and is considering launching a new product. Designing the new product has already cost $ 451 comma 000. The company estimates that it will sell 756 comma 000 units per year for$ 2.98 per unit and variable non-labor costs will be $ 1.19 per unit. Production will end after year 3. New equipment costing$ 1.13 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 $ 298 comma 000. The new product will require the working capital to increase to a level of $ 383 comma 000 immediately, then to $ 391 comma 000 in year 1, in year 2 the level will be $ 344 comma 000, and finally in year 3 the level will return to $ 298 comma 000. Your tax rate is 21 %. The discount rate for this project is 9.6 %. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started