Question

Your company has been doing​ well, reaching

$ 1.07$1.07

million in​ earnings, and is considering launching a new product. Designing the new product has already cost

$ 451 comma 000$451,000.

The company estimates that it will sell

756 comma 000756,000

units per year for  

$ 2.98$2.98

per unit and variable​ non-labor costs will be

$ 1.19$1.19

per unit. Production will end after year

33.

New equipment costing  

$ 1.13$1.13

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

33

and plan to scrap it. Your current level of working capital is

$ 298 comma 000$298,000.

The new product will require the working capital to increase to a level of

$ 383 comma 000$383,000

​immediately, then to

$ 391 comma 000$391,000

in year​ 1, in year 2 the level will be

$ 344 comma 000$344,000​,

and finally in year 3 the level will return to

$ 298 comma 000$298,000.

Your tax rate is

21 %21%.

The discount rate for this project is

9.6 %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