Your company has been doing well, reaching $1.16 million in earnings, and is considering launching a new product. Designing the new product has already cost $501,000. The company estimates that it will sell 797,000 units per year for $3.06 per unit and variable non-labor costs will be $1.12 per unit. Production will end after year 3. New equipment costing $1.09 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 $292,000. The new product will require the working capital to increase to a level of $384,000 immediately, then to $395,000

in year 1, in year 2 the level will be $345,000, and finally in year 3 the level will return to $292,000. Your tax rate is 21%.

The discount rate for this project is 10.2%.

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

Note:

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