Situation

Kent State Innovation Labs (KSIL) is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by you. The production line would be set up in unused space in a warehouse in downtown Kent, OH. The invoice price of the machinery would be approximately $200,000, would require another $10,000 in shipping charges, and would cost an additional $30,000 for equipment installation. The machinery has an economic life of 4 years, and KSIL has secured a special tax ruling that places the equipment in the MACRS 3-year class. Management expects the machinery to have a salvage value of $25,000 after 4 years of use.

This new product line would generate an incremental amount of sales of 1,250 units per year for 4 years at an incremental cost in the first year of $100 per unit, excluding depreciation. Each unit can be sold in the first year for $200. The sales price and cost are both expected to increase by an inflation rate of 3% per year. The firms net working capital, to handle the new line, would have to increase by an amount equal to 12% of sales revenues. The firms overall weighted average cost of capital is 10%, and the firm's tax rate is 40%.

a. Enter the input data for this project

Analysis of New Expansion Project

Part I: Input Data

Results summary

Equipment cost

NPV =

Shipping charge

IRR =

Installation charge

MIRR =

Economic Life

Payback =

Salvage Value

Tax Rate

Cost of Capital

Units Sold

Sales Price Per Unit

Incremental Cost Per Unit

NWC/Sales

Inflation rate

The firm spent $150,000 last year researching the feasability of taking on this project. Should this cost be considered in the analysis? Why or why not?

b. Find the Depreciable Basis and Annual Depreciation Expense

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis =

Year

%

x

Basis

=

Depr.

Remaining Book Value

1

0.33

2

0.45

3

0.15

4

0.07