Question
Your company is considering launching a new product. Designing the new product has already cost $700,000. The company estimates that it will sell 800,000 units
Your company is considering launching a new product. Designing the new product has already cost $700,000. The company estimates that it will sell 800,000 units per year for $3 per unit and variable non-labor costs will be $1 per unit. Production will end after year 4. New equipment costing $1 million is required. The equipment will be put into use next year (year 1) and depreciated to zero using the 5-year MACRS schedule. You plan to sell the equipment for book value at the end of year 5. Your current level of working capital is $300,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $400,000 in year 1, in year 2 the level will be $350,000, and finally in year 3 the level will return to $300,000. Your tax rate is 35%. The discount rate for this project is 10%.
a. Calculate depreciation expense for each year.
b. Calculate Cashflows from the changes in NWC.
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