Your company has been doing well, reaching$1.19million in earnings, and is considering launching a new product. Designing the new product has already cost$508,000.The company estimates that it will sell781,000units per year for$3.06per unit and variable non-labor costs will be$1.11 perunit. Production will end after year 3.New equipment costing $1.15 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 3and 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$381,000immediately, then to$393,000 in year 1, in year 2 the level will be

$341,000,and finally in year 3 the level will return to$308,000.Your tax rate is21%.The discount rate for this project is

10.1%.Do the capital budgeting analysis for this project and calculate its NPV.

Note:

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

Complete the following

According to the bonus depreciation schedule, depreciation will be: Year 1 2 3 Bonus depreciation $0 $0 Which comes from the fact that the TCJA allows you to take 100% of the depreciation in the year you put the equipment into use. The capital budgeting analysis for this project is shown below: Year 0 Year 1 Year 2 Year 3 $ 0 $ $ $ Sales - Cost of Goods Sold 0 $ 0 $ $ $ 0 $ 0 $ $ $ 0 Gross Profit - Depreciation EBIT - Incremental Earnings + Depreciation - Incremental Working Capital - Capital Investment Incremental Free Cash Flow GA 0 $ $ 0 $ >$ $ $ The NPV of the project is: FCF NPV = = (1 + r) 1=0 NPV=