Your company has been doing well, reaching $1.05 million in earnings, and is considering launching a new product. Designing the new product has already cost $534,000. The company estimates that it will sell 791,000 units per year for $2.94 per unit and variable non-labor costs will be $1.08 per unit. Production will end after year 3. New equipment costing $1.19 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 3 and plan to scrap it. Your current level of working capital is $304,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $403,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level willl return to $304,000. Your tax rate is 21%. 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. Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Year 1
Your company has been doing well, reaching $1.05 million in earnings, and is considering launching a new product. Designing the new product has already cost $534,000. The company estimates that it will sell 791,000 units per year for $2.94 per unit and variable non-labor costs will be $1.08 per unit. Production will end after year 3. New equipment costing $1.19 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 3 and plan to scrap it. Your current level of working capital is $304,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $403,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level willl return to $304,000. Your tax rate is 21%. 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. Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Year 1
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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