Your company has been doing well, reaching $1.13 million in earnings, and is considering launching a new product. Designing the new product has already cost $501,000. The company estimates that it will sell 797,000 units per year for $3.09 per unit and variable non-labor costs will be $1.05 per unit. Production will end after year 3. New equipment costing $1.19 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 $290,000. The new product will require the working capital to increase to a level of $377,000 immediately, then to $406,000 in year 1, in year 2 the level will be $356,000, and finally in year 3 the level will return to $290,000. Your tax rate is 25%. The discount rate for this project is 9.7%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Depreciation in year 2 will be $291,431. (Round to the nearest dollar.) Depreciation in year 3 will be $ 208131. (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Sales - Cost of Goods Sold $ Gross Profit - Depreciation EBIT - Tax at 25% Incremental Earnings + Depreciation -Changes in NWC - Capital Expenditures Year 0 S $ Year 1 2,462,730 $ 836,850 1,625,880 $ 170,051 1,455,829 $ 363,957 Year 2 Year 3 2,462,730 $ 69 2,462,730 836,850 836,850 1,625,880 $ 291,431 1,625,880 208,131 1,334,449 $ 1,417,749 333,612 354,437 S 1,091,872 $ 1,000,837 $ 1,063,312 170,051 291,431 208,131 87,000 29,000 (50,000) (66,000) 1,190,000 0 0 (520,387) 1,342,268 $ 1,857,830 Incremental Free Cash Flows $ (1,277,000) $ 1,232,923 The NPV of the project is $ 2,369,590. (Round to the nearest dollar.)
Your company has been doing well, reaching $1.13 million in earnings, and is considering launching a new product. Designing the new product has already cost $501,000. The company estimates that it will sell 797,000 units per year for $3.09 per unit and variable non-labor costs will be $1.05 per unit. Production will end after year 3. New equipment costing $1.19 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 $290,000. The new product will require the working capital to increase to a level of $377,000 immediately, then to $406,000 in year 1, in year 2 the level will be $356,000, and finally in year 3 the level will return to $290,000. Your tax rate is 25%. The discount rate for this project is 9.7%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Depreciation in year 2 will be $291,431. (Round to the nearest dollar.) Depreciation in year 3 will be $ 208131. (Round to the nearest dollar.) Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Sales - Cost of Goods Sold $ Gross Profit - Depreciation EBIT - Tax at 25% Incremental Earnings + Depreciation -Changes in NWC - Capital Expenditures Year 0 S $ Year 1 2,462,730 $ 836,850 1,625,880 $ 170,051 1,455,829 $ 363,957 Year 2 Year 3 2,462,730 $ 69 2,462,730 836,850 836,850 1,625,880 $ 291,431 1,625,880 208,131 1,334,449 $ 1,417,749 333,612 354,437 S 1,091,872 $ 1,000,837 $ 1,063,312 170,051 291,431 208,131 87,000 29,000 (50,000) (66,000) 1,190,000 0 0 (520,387) 1,342,268 $ 1,857,830 Incremental Free Cash Flows $ (1,277,000) $ 1,232,923 The NPV of the project is $ 2,369,590. (Round to the nearest dollar.)
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1lM
Related questions
Question
100%
I need help to see how I would get the capital expenditures for year 3, (520,387). I don't understand how this was gotten.
Transcribed Image Text:Your company has been doing well, reaching $1.13 million in earnings, and is considering launching a new product. Designing the new product has
already cost $501,000. The company estimates that it will sell 797,000 units per year for $3.09 per unit and variable non-labor costs will be $1.05 per
unit. Production will end after year 3. New equipment costing $1.19 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 $290,000. The new product
will require the working capital to increase to a level of $377,000 immediately, then to $406,000 in year 1, in year 2 the level will be $356,000, and finally
in year 3 the level will return to $290,000. Your tax rate is 25%. The discount rate for this project is 9.7%. Do the capital budgeting analysis for this project
and calculate its NPV.
Note: Assume that the equipment is put into use in year 1.
Depreciation in year 2 will be $291,431. (Round to the nearest dollar.)
Depreciation in year 3 will be $ 208131. (Round to the nearest dollar.)
Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.)
Sales
- Cost of Goods Sold
$
Gross Profit
- Depreciation
EBIT
- Tax at 25%
Incremental Earnings
+ Depreciation
-Changes in NWC
- Capital Expenditures
Year 0
S
$
Year 1
2,462,730 $
836,850
1,625,880 $
170,051
1,455,829 $
363,957
Year 2
Year 3
2,462,730 $
69
2,462,730
836,850
836,850
1,625,880 $
291,431
1,625,880
208,131
1,334,449 $
1,417,749
333,612
354,437
S
1,091,872 $
1,000,837 $
1,063,312
170,051
291,431
208,131
87,000
29,000
(50,000)
(66,000)
1,190,000
0
0
(520,387)
1,342,268 $
1,857,830
Incremental Free Cash Flows
$ (1,277,000) $ 1,232,923
The NPV of the project is $ 2,369,590. (Round to the nearest dollar.)
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