Question

Your company has been doing​ well, reaching $ 1.1 million in​ earnings, and is considering launching a new product. Designing the new product has already cost $ 510 comma 000. The company estimates that it will sell 792 comma 000 units per year for $ 2.98 per unit and variable​ non-labor costs will be $ 1.05 per unit. Production will end after year 3. New equipment costing $ 1.08 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 $ 293 comma 000. The new product will require the working capital to increase to a level of $ 372 comma 000 ​immediately, then to $ 403 comma 000 in year​ 1, in year 2 the level will be $ 355 comma 000​, and finally in year 3 the level will return to $ 293 comma 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.

1) what is The capital budgeting analysis for this project ?

2) what is the NPV?

Answer 1

Answer (1):

First let us calculate net working capital increase and recovery of this project:

The capital budgeting analysis for this project:

The cost of designing the new product amounting $510,000 has already been incurred and hence not relevant for capital budgeting analysis.

Answer (2):