Question

Your company has been doing​ well, reaching $1.09 million in​ earnings, and is considering launching a new product. Designing the new product has already cost $458,000. The company estimates that it will sell 836,000 units per year for $2.95 per unit and variable​ non-labor costs will be $1.17 per unit. Production will end after year 3. New equipment costing   $1.12 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 $291,000. The new product will require the working capital to increase to a level of $370,000 ​immediately, then to $390,000 in year​ 1, in year 2 the level will be $347,000​, and finally in year 3 the level will return to $291,000. Your tax rate is 21%. The discount rate for this project is 10.5%. Do the capital budgeting analysis for this project and calculate its NPV.

Note​: Assume that the equipment is put into use in year 1.

Answer 1

Year	0	1	2	3
Workign Capital	=291000-370000	=370000-390000	=390000-347000	=347000-291000
Calculation	=291000-370000	-20000	43000	56000

Sale Revune = Units sold * per unit selling price

Depreciation - Given law allows the firm to deduct the total depreciation in year 1 itself. Hence considered whole amount in year 1.

Rest are standard Calculation

PV of the cash flow => (PV in year A)/((1+Discount Rate)^Year A))

Year	0	1	2	3
Workign Capital	-79000	-20000	43000	56000
Cost of instrument	-1120000
Sales Revenue		24,66,200	24,66,200	24,66,200
-Variable Non Labor Cost		9,78,120	9,78,120	9,78,120
Depreciation		11,20,000	-	-
Profit before tax		348080	1531080	1544080
-Income Tax (Profit before tax * Tax rate@21%)		73097	321527	324257
=Net Income		274983	1209553	1219823
Cost of Captial	10.50%
NPV at Year 0 (Discounted with 10.5%)	-1199000	248853.575	990604.779	904086.647
NPV = Sum of the above row	944545.000