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
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
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
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
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
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)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
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-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education