Question

Your company has been doing? well, reaching $1.02 million in? earnings, and is considering launching a new product. Designing the new product has already cost $508,000. The company estimates that it will sell 804,000 units per year for $2.91 per unit and variable? non-labor costs will be$1.02 per unit. Production will end after year 33. New equipment costing $1.11 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 $306,000. The new product will require the working capital to increase to a level of $387,000 ?immediately, then to $402,000 in year? 1, $352,000 in year? 2, and finally return to $306,000. Your tax rate is 35%. The discount rate for this project is 9.6 %. 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

Tax rate	35%
	Year-1	Year-2	Year-3
Tons	804,000	804,000	804,000
Sale @ 2.91	2,339,640	2,339,640	2,339,640
Less: Operating Cost @ 1.02	820,080	820,080	820,080
saving	1,519,560	1,519,560	1,519,560
Less: Depreciation as per table given below	157,190	269,390	192,390
Profit before tax	1,362,370	1,250,170	1,327,170
Tax	476,830	437,560	464,510
Profit After Tax	885,541	812,611	862,661
Add Depreciation	157,190	269,390	192,390
Cash Profit After tax	1,042,731	1,082,001	1,055,051
Cost of macine		1,100,000
Depreciation		618,970
WDV		481,030
Sale price		481,030
Profit/(Loss)		-
Tax		-
Sale price after tax		481,030
Depreciation	Year-1	Year-2	Year-3			Total
Cost	1,100,000	1,100,000	1,100,000
Dep Rate	14.29%	24.49%	17.49%
Deprecaition	157,190	269,390	192,390			618,970
Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 9.6%	Present values
0	(1,100,000)	(81,000)		(1,181,000)	1.000	(1,181,000)
1		(15,000)	1,042,731	1,027,731	0.912	937,710
2		50,000	1,082,001	1,132,001	0.832	942,379
3	481,030	46,000	1,055,051	1,582,081	0.760	1,201,702
				Net Present Value		1,900,791