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 $504,000. The company estimates that it wil sell 794,000 units per year for $2.97 per unit and variable non -abor costs will be $1.17 per unit. Production will end after year 3. New equipment costing$1.13 million will be rquired. 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. You current level of working capital is $306,000. The new product will require the working capital to increase to a level of $377,000 immediately then to $408,000 in year 1, in year 2 the level will be $349,000, and finally in year 3 the level will return to $306,000. You tax rate is 21%. The discount rate for this project is 9.8% Do the capital budgeting analysis for this project and calculate its NPV.

Answer 1