Your company has been doing well, reaching $1.18 million in earnings, and is considering launching a new product. Designing the new product has already cost $505,000. The company estimates that it will sell 815,000 units per year for $2.91 per unit and variable non-labor costs will be $1.16 per unit. Production will end after year 3. New equipment costing $1.18 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 $384,000 immediately, then to $406,000 in year 1, in year 2 the level will be $360,000, and finally in year 3 the level will return to $301,000. Your tax rate is 21%. The discount rate for this project is 10.2%. 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 According to the 7-year MACRS schedule, depreciation in year 1 will be $ Depreciation in year 2 will be $ (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 Sales - Cost of Goods Sold Gross Profit - Depreciation EBIT - Tax Incremental Earnings + Depreciation - Incremental Working Capital - Capital Investment Incremental Free Cash Flow The NPV of the project is $ $ $ $ (irrelevant). (Select from the drop-down menu.) $ $ $ $ $ $ (Round to the nearest dollar.) (Round to the nearest dollar.) $ $ $ $ $ $ $ $ Year 3
Your company has been doing well, reaching $1.18 million in earnings, and is considering launching a new product. Designing the new product has already cost $505,000. The company estimates that it will sell 815,000 units per year for $2.91 per unit and variable non-labor costs will be $1.16 per unit. Production will end after year 3. New equipment costing $1.18 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 $384,000 immediately, then to $406,000 in year 1, in year 2 the level will be $360,000, and finally in year 3 the level will return to $301,000. Your tax rate is 21%. The discount rate for this project is 10.2%. 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 According to the 7-year MACRS schedule, depreciation in year 1 will be $ Depreciation in year 2 will be $ (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 Sales - Cost of Goods Sold Gross Profit - Depreciation EBIT - Tax Incremental Earnings + Depreciation - Incremental Working Capital - Capital Investment Incremental Free Cash Flow The NPV of the project is $ $ $ $ (irrelevant). (Select from the drop-down menu.) $ $ $ $ $ $ (Round to the nearest dollar.) (Round to the nearest dollar.) $ $ $ $ $ $ $ $ Year 3
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Your company has been doing well, reaching $1.18 million in earnings, and is considering launching a new product. Designing the new product has already cost $505,000. The company estimates
that it will sell 815,000 units per year for $2.91 per unit and variable non-labor costs will be $1.16 per unit. Production will end after year 3. New equipment costing $1.18 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 $384,000 immediately, then to $406,000 in year 1, in year 2 the level will be $360,000, and finally in year 3 the level will return to
$301,000. Your tax rate is 21%. The discount rate for this project is 10.2%. 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
According to the 7-year MACRS schedule, depreciation in year 1 will be $
Depreciation in year 2 will be $
(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
Sales
- Cost of Goods Sold
Gross Profit
- Depreciation
EBIT
- Tax
Incremental Earnings
+ Depreciation
- Incremental Working Capital
- Capital Investment
Incremental Free Cash Flow
The NPV of the project is $
$
$
$
$
(irrelevant). (Select from the drop-down menu.)
$
$
6A
EA
6
GA
(Round to the nearest dollar.)
(Round to the nearest dollar.)
GA
6A
GA
GA
GA
60
$
GA
$
CA
Year 3](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc7b0c514-cfd2-46b9-85f8-d3efdf08306d%2F92defe54-ea94-46dc-b6e6-9ca8a69cf9ae%2Fnfwlcha_processed.png&w=3840&q=75)
Transcribed Image Text:Your company has been doing well, reaching $1.18 million in earnings, and is considering launching a new product. Designing the new product has already cost $505,000. The company estimates
that it will sell 815,000 units per year for $2.91 per unit and variable non-labor costs will be $1.16 per unit. Production will end after year 3. New equipment costing $1.18 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 $384,000 immediately, then to $406,000 in year 1, in year 2 the level will be $360,000, and finally in year 3 the level will return to
$301,000. Your tax rate is 21%. The discount rate for this project is 10.2%. 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
According to the 7-year MACRS schedule, depreciation in year 1 will be $
Depreciation in year 2 will be $
(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
Sales
- Cost of Goods Sold
Gross Profit
- Depreciation
EBIT
- Tax
Incremental Earnings
+ Depreciation
- Incremental Working Capital
- Capital Investment
Incremental Free Cash Flow
The NPV of the project is $
$
$
$
$
(irrelevant). (Select from the drop-down menu.)
$
$
6A
EA
6
GA
(Round to the nearest dollar.)
(Round to the nearest dollar.)
GA
6A
GA
GA
GA
60
$
GA
$
CA
Year 3
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education