Question

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 $ 471,000. The company estimates that it will sell 777,000 units per year for  $ 2.92 per unit and variable​ non-labor costs will be $ 1.15 per unit. Production will end after year 3. New equipment costing  $ 1.11 million will be required. The equipment will be depreciated using​ 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $ 308,000. The new product will require the working capital to increase to a level of $ 377,000 ​immediately, then to $ 396,000 in year​ 1, in year 2 the level will be $ 359,000​, and finally in year 3 the level will return to $ 308,000. Your tax rate is 21 %. The discount rate for this project is 10.4 %. 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 BLANK ​(irrelevant).  ​(Select from the​ drop-down menu.) According to the bonus depreciation​ schedule, depreciation in year 1 will be ​$ ___. ​ (Round to the nearest​ dollar.) Depreciation in years 2 and 3 will be ​$___. ​(Round to the nearest​ dollar.) Complete the capital budgeting analysis for this project​ below:  ​(Round to the nearest​ dollar.) Year 0, 1, 2, & 3 need the following information: Sales $ ___Cost of Goods Sold $____ Gross Profit $____ - Depreciation $____ EBIT $____ - Tax $ ____Incremental Earnings $ ____+ Depreciation $ ____- Incremental Working Capital $ _____- Capital Investment $ ____Incremental Free Cash Flow $____ Year 1 $ ____Year 2 $ ____ Year 3 $ )____ The NPV of the project is ​$_____. ​(Round to the nearest​ dollar.) Enter any number in the edit fields and then continue to the next question.

Answer 1

Solution:
	Notes:
	Design cost of $ 471000 is already incurred and is irrelevant
	Bonus Depreciation is 100% of equipment cost under 2017 TCJA
	Tax rate -21%
	Discount Rate -10.4%
		Y0	Y1	Y2	Y3
	Sales (777000*2.92)		2,268,840	2,268,840	2,268,840	A
(-)	Variable non labour costs (777000*1.15)		(893,550)	(893,550)	(893,550)	B
	Gross Profit		1,375,290	1,375,290	1,375,290	C=A-B
(-)	Depreciation (100% Bonus 2017 TCJA)		(1,110,000)	-	-	D
	EBIT		265,290	1,375,290	1,375,290	E=C-D
(-)	Tax @21%		(55,711)	(288,811)	(288,811)	F=E*21%
	Incremental Earnings		209,579	1,086,479	1,086,479	G=E-F
(+)	Depreciation being non cash expense		1,110,000	-	-	D
(-)	Incremental Working Capital	(69,000)	(19,000)	37000	51000	H
		=-(377000-308000)	=-(396000-377000)	=-(359000-396000)	=-(308000-359000)
(-)	Capital Investment in $	(1,110,000)				I
	Incremental Free Cash Flows	(1,179,000)	1,300,579	1,123,479	1,137,479	J=G+D+H+I
	DF @ 10.4%	1	0.9058	0.8205	0.7432	I
	Discounted Cash Flows	(1,179,000)	1,178,061	921,779	845,349	J=H*I
	NPV (Sum DCF Y0 to Y3)	1,766,189
	NPV of the Project is $ 1,766,189