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 $ 513,000. The company estimates that it will sell 782,000 units per year for $ 3.07 per unit and variable? non-labor costs will be $ 1.13 per unit. Production will end after year 3. New equipment costing $ 1.01 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 $ 298,000. The new product will require the working capital to increase to a level of $ 376,000 ?immediately, then to $ 392,000 in year? 1, $ 349,000 in year? 2, and finally return to $ 298,000. Your tax rate is 35 %. The discount rate for this project is 10.1 %. Do the capital budgeting analysis for this project and calculate its NPV.

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

	YEAR 0
SALES	$
- COGS	$
GROSS PROFIT	$
- DEPRECIATION	$
EBIT	$
-TAX	$
INCREMENTAL EARNINGS	$
+ DEPRECIATION	$
-INCREMENTAL WORKING CAPITAL	$
- CAPITAL investment	$
incremental free cash flow	$

Answer 1

Have a look at the following tables

Kindly note that the asset has been sold at book values at the end of year 3. So there shall not be any tax impact.