Your company has been doing well, reaching $1.08 million in earnings, and is considering launching a...

 

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Your company has been doing well, reaching $1.08 million in earnings, and is considering launching a new product. Designing the new product has already cost $463,000. The company estimates that it will sell 816,000 units per year for $2.92 per unit and variable non-labor costs will be $1.08 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 $294,000. The new product will require the working capital to increase to a level of $388,000 immediately, then to $396,000 in year 1, in year 2 the level will be $344,000, and finally in year 3 the level will return to $294,000. 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. Your company has been doing well, reaching $1.08 million in earnings, and is considering launching a new product. Designing the new product has already cost $463,000. The company estimates that it will sell 816,000 units per year for $2.92 per unit and variable non-labor costs will be $1.08 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 $294,000. The new product will require the working capital to increase to a level of $388,000 immediately, then to $396,000 in year 1, in year 2 the level will be $344,000, and finally in year 3 the level will return to $294,000. 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.

Answer rating: 100% (QA)

NPV Analysis Initial Investment Cost of Designing the New Product 463000 Cost of New Equipment 1090000 Increase in Working Capital 94000 Total Initial ... View the full answer