Your company has been doing well, reaching $1.12 million in earnings, and is considering launching a...

 

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Your company has been doing well, reaching $1.12 million in earnings, and is considering launching a new product. Designing the new product has already cost $496,000. The company estimates that it will sell 837,000 units per year for $3.09 per unit and variable non-labor costs will be $1.17 per unit. Production will end after year 3. New equipment costing $1.16 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 $304,000. The new product will require the working capital to increase to a level of $372,000 immediately, then to $391,000 in year 1, in year 2 the level will be $348,000, and finally in year 3 the level will return to $304,000. Your tax rate is 21%. The discount rate for this project is 9.5%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Design already happened and is (irrelevant). (Select from the drop-down menu.) According to the 7-year MACRS schedule, depreciation in year 1 will be $ (Round to the nearest dollar.) Depreciation in year 2 will be $ (Round to the nearest dollar.) Depreciation in year 3 will be $ (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Sales - Cost of Goods Sold Gross Profit - Depreciation EBIT - Tax Incremental Earnings + Depreciation -Incremental Working Capital - Capital Investment Incremental Free Cash Flow $ Year 0 Year 1 $ The NPV of the project is S (Round to the nearest dollar.) Year 2 Year 3 Your company has been doing well, reaching $1.12 million in earnings, and is considering launching a new product. Designing the new product has already cost $496,000. The company estimates that it will sell 837,000 units per year for $3.09 per unit and variable non-labor costs will be $1.17 per unit. Production will end after year 3. New equipment costing $1.16 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 $304,000. The new product will require the working capital to increase to a level of $372,000 immediately, then to $391,000 in year 1, in year 2 the level will be $348,000, and finally in year 3 the level will return to $304,000. Your tax rate is 21%. The discount rate for this project is 9.5%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Design already happened and is (irrelevant). (Select from the drop-down menu.) According to the 7-year MACRS schedule, depreciation in year 1 will be $ (Round to the nearest dollar.) Depreciation in year 2 will be $ (Round to the nearest dollar.) Depreciation in year 3 will be $ (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Sales - Cost of Goods Sold Gross Profit - Depreciation EBIT - Tax Incremental Earnings + Depreciation -Incremental Working Capital - Capital Investment Incremental Free Cash Flow $ Year 0 Year 1 $ The NPV of the project is S (Round to the nearest dollar.) Year 2 Year 3