Your company has been doing well, reaching $1.2 million in earnings, and is considering launching a new product. Designing the new product has already cost $481,000. The company estimates that it will sell 800,000 units per year for $3.06 per unit and variable non-labor costs will be $1.18 per unit. Production will end after year 3. New equipment costing $1.06 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 $308,000. The new product will require the working capital to increase to a level of $376,000 immediately, then to $395,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level will return to $308,000. Your tax rate is 21%. The discount rate for this project is 9.5%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Depreciation in years 2 and 3 will be $ . (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Year 1 Year 2 Year 3 6 6 Sales - Cost of Goods Sold Gross Profit s osos 6 6 6 6 - Depreciation EBIT 6 6 6 6 s to osos os as ses 6 - Tax Incremental Earnings + Depreciation - Incremental Working Capital - Capital Investment Incremental Free Cash Flow 6 6 6 6 The NPV of the project is $ . (Round to the nearest dollar.) Your company has been doing well, reaching $1.2 million in eamings, and is considering launching a new product. Designing the new product has already cost $481,000. The company estimates that it will sell 800,000 units per year for $3.06 per unit and variable non-labor costs will be $1.18 per unit. Production will end after year 3. New equipment costing $1.06 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 $308,000. The new product will require the working capital to increase to a level of $376,000 immediately, then to $395,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level will return to $308,000. Your tax rate is 21%. The discount rate for this project is 9.5%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. 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 $1. (Round to the nearest dollar.) Depreciation in years 2 and 3 will be $ (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.)
