Question
Your company has been doing well, reaching$1.11million in earnings, and is considering launching a new product. Designing the new product has already cost $499,000. The
Your company has been doing well, reaching$1.11million in earnings, and is considering launching a new product. Designing the new product has already cost $499,000. The company estimates that it will sell 775,000 units per year for $3.08 per unit and variable non-labor costs will be $1.03 per unit. Production will end after year 3. New equipment costing $1.1 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 $298,000. The new product will require the working capital to increase to a level of $382,000 immediately, then to $410,000 in year 1, in year 2 the level will be $357,000, and finally in year 3 the level will return to $298,000. Your tax rate is 21%. The discount rate for this project is10.4%.
Do the capital budgeting analysis for this project and calculate its NPV.
Note:Assume that the equipment is put into use in year 1.
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