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fx Your company has been doing well, reaching $$1$ million in earnings, and is considering'

Problem $9-28$

Your company has been doing well, reaching $$1$ million in earnings, and is considering launching a new product. Designing the new iproduct has already cost $$500,000.$ The company estimates that it will sell $800,000$ units per year for $$3$ per unit and variable nonlabor costs will be $$1$ per unit. Production will end after year $3.$ New equipment costing $$1$ million will be required. The equipment will ibe put into use in year $1$ and depreciated to zero using the $7-$year MACRS schedule. You plan to sell the equipment for book value at the end of year $3.$ Your current level of working capital is $$300,000.$ The new product will require the working capital to increase to a flevel of $$380,000$ immediately, then to $$400,000$ in year $1,$ in year $2$ the level will be $$350,000,$ and finally in year $3$ the level will freturn to $$300,000.$ Your tax rate is $35\%.$ The discount rate for this project is $10\%.$ Do the capital budgeting analysis for this project and calculate its NPV$.$

Depreciation

MACRS Schedule

Depreciation $($in Thousands$)$

NPV

Year

$1$

$2$

$3$

$4$

Change in NWC

Year Without Project

$0$

$\backslash$table$[[14\mathrm{.}29\%,24\mathrm{.}49\%,17\mathrm{.}49\%,12\mathrm{.}49\%$