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 $528,000. The company estimates that it will sell 771,000 units per year for $2.95 per unit and variable non-labor costs will be $1.04 per unit. Production will end after year 3. New equipment costing $1.2 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 $301,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $390,000 in year 1, in year 2 the level will be $358,000, and finally in year 3 the level will return to $301,000. Your tax rate is 21%. The discount rate for this project is 10.5%. 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 sunk (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.)

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 $528,000. The company estimates that it will sell 771,000 units per year for $2.95 per unit and variable non-labor costs will be $1.04 per unit. Production will end after year 3. New equipment costing $1.2 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 $301,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $390,000 in year 1, in year 2 the level will be $358,000, and finally in year 3 the level will return to $301,000. Your tax rate is 21%. The discount rate for this project is 10.5%. 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 sunk (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.)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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