Your company has been doing well, reaching
$1.12
million in earnings, and is considering launching a new product. Designing the new product has already cost
$479,000.
The company estimates that it will sell
779,000
units per year for
$2.95
per unit and variable non-labor costs will be
$1.02
per unit. Production will end after year
3.
New equipment costing
$1.18
million will be required. The equipment will be depreciated to zero using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year
3.
Your current level of working capital is
$302,000.
The new product will require the working capital to increase to a level of
$371,000
immediately, then to
$405,000
in year 1, in year 2 the level will be
$347,000,
and finally in year 3 the level will return to
$302,000.
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.
Your company has been doing well, reaching S1.12 million in earnings, and is considering launching a new product. Designing the new product has already cost $479,000. The company estimates that it will sell 779,000 units per year for $2.95 per unit and variable non-labor costs will be $1.02 per unit. Production will end after year 3. New equipment costing $1.18 million will be required. The equipment will be depreciated to zero using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of working capital is is $302,000. The new product will require the working capital to increase to a level of $371,000 immediately, then to $405,000 in year 1, in year 2 the level will be RRRRRRR Design already happened and is sunk (irrelevant). (Select from the drop-down menu.) According to the 7-year MACRS schedule, depreciation in year 1 will be $ 168,622. (Round to the nearest dollar.) Depreciation in year 2 will be $ 288,982". (Round to the nearest dollar.) Depreciation in year 3 will be $ 206,382. (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year Yoar 2 Year 3 Sales $ $ $ Cost of Goods Sold Gross Profit $ Depreciation EBIT Year 1 S $ S s $ $1 - Tax Incremental Earnings + Depreciation Incremental Working Capital Capital Investment Incremental Free Cash Flow S Help me solve this View an example Get more help Clear all Check answer Your company has been doing well, reaching S1.12 million in earnings, and is considering launching a new product. Designing the new product has already cost $479,000. The company estimates that it will sell 779,000 units per year for $2.95 per unit and variable non-labor costs will be $1.02 per unit. Production will end after year 3. New equipment costing $1.18 million will be required. The equipment will be depreciated to zero using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of working capital is is $302,000. The new product will require the working capital to increase to a level of $371,000 immediately, then to $405,000 in year 1, in year 2 the level will be RRRRRRR Design already happened and is sunk (irrelevant). (Select from the drop-down menu.) According to the 7-year MACRS schedule, depreciation in year 1 will be $ 168,622. (Round to the nearest dollar.) Depreciation in year 2 will be $ 288,982". (Round to the nearest dollar.) Depreciation in year 3 will be $ 206,382. (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year Yoar 2 Year 3 Sales $ $ $ Cost of Goods Sold Gross Profit $ Depreciation EBIT Year 1 S $ S s $ $1 - Tax Incremental Earnings + Depreciation Incremental Working Capital Capital Investment Incremental Free Cash Flow S Help me solve this View an example Get more help Clear all Check
