Answered: our company has been doing well,…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1bM

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5. Your company has been doing well, reaching $1.15 million in earnings, and is considering launching a new product. Designing the new product has already cost $466,000. The company estimates that it will sell 756,000 units per year for $2.94 per unit and variable non-labor costs will be $1.03 per unit. Production will end after year 3. New equipment costing $1.07 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 $378,000 immediately, then to $396,000 in year 1, in year 2 the level will be $354,000, and finally in year 3 the level will return to $306,000. Your 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. Note: Assume that the equipment is put into use in year 1. **drop down menu options say: sunk, fixed, and variable**

Your company has been doing well, reaching $1.15 million in earnings, and is considering launching a new product. Designing the new product has already cöst $466,000. The company estimates that it will sell
756,000 units per year for $2.94 per unit and variable non-labor costs will be $1.03 per unit. Production will end after year 3. New equipment costing $1.07 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 $378,000 immediately, then to $396,000 in year 1, in year 2 the level will be $354,000, and finally in year 3 the level will return to $306,000. Your 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.
Note: Assume that the equipment is put into use in year 1.
Design already happened and is
V (irrelevant). (Select from the drop-down menu.)
According to the 7-year MACRS schedule, depreciation in year 1 will be $ (Round to the nearest dollar.)
Depreciation in year 2 will be S. (Round to the nearest dollar.)
Depreciation in year 3 will be $. (Round to the nearest dollar.)
Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.)
Year 0
Year 1
Year 2
Year 3
Sales
- Cost of Goods Sold
Gross Profit
2$
- Depreciation
EBIT
$
$
Tax
Incremental Earnings
$
$
+ Depreciation
Incremental Working Capital
- Capital Investment
Incremental Free Cash Flow
The NPV of the project is S (Round to the nearest dollar

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