Problem 1

Sugar Land Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space (Market Value Zero) in Sugar Land' main plant. Total cost of the machine is $330,000. The machinery has an economic life of 4 years and will be depreciated using MACRS for 3-year property class.The machine will have a salvage value of $35,000 after 4 years.

The new line will generate Sales of 2,000 units per year for 4 years and the variable cost per unit is $114 in the first year.Each unit can be sold for $220 in the first year. The sales price and variable cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by $30,000 at time zero (No change in NWC in years 1 through 3 and the NWC will be recouped in year 4).The firm's tax rate is 40% and its weighted average cost of capital is 11%.

NOTE: Please be sure to properly label your answers and where appropriate, please copy and paste the table into the answer submission box.

a. What are the annual depreciation expenses for years 1 through 4? (10 points)

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