Your company has been doing well, reaching $1 million in earnings, and is considering launching a new product. Designing the new product has already cost $500,000. The company estimates that it will sell 820,000 units per year for $6.75 per unit and variable non-labor costs will be $1.5 per unit. Production will end after year 3. New equipment costing $1 million will be required. The equipment will be put into use in year 1 and 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 $310,000. The new product will require the working capital to increase to a level of $450,000 immediately, then to $465,000 in year 1, in year 2 the level will be $320,000, and finally in year 3 the level will return to $310,000. Your tax rate is 21%. The discount rate for this project is 10%. Do the capital budgeting analysis for this project and calculate its NPV.
Your company has been doing well, reaching $1 million in earnings, and is considering launching a new product. Designing the new product has already cost $500,000. The company estimates that it will sell 820,000 units per year for $6.75 per unit and variable non-labor costs will be $1.5 per unit. Production will end after year 3. New equipment costing $1 million will be required. The equipment will be put into use in year 1 and
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
