Your company has been doing well, reaching $1. 14 million in earnings, and is co

Question

Your company has been doing well, reaching $1. 14 million in earnings, and is considering launching a new product. Designing the new product has already cost $512,000. The company estimates that it will sell 814,000 units per year for $3.09 per unit and variable non-labor costs will be $1.02 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 $304,000. The new product will require the working capital to increase to a level of $386,000 immediately, then to $410,000 in year 1, $341,000 in year 2, and finally return to $304,000. Your tax rate is 35%. The discount rate for this project is 9.7%. Do the capital budgeting analysis for this project and calculate its NPV. Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.)

Explanation / Answer

Sales 2515260 Cost of Goods sold 830280 Gross profit 1684980 Drepreciation 168622 EBIT 1516358 Tax 530725.3 Incremental Earnings 985632.7 Depreciation 168622 Incremental Working capital 82000 Capital Investment 40000 Incremental Free Cash Flow 1032255 Year Rate Depreciation Book value 1 14.29% 168622 1011378 2 24.49% 247686.5 763691.5 3 17.49% 133569.6 630121.9 4 12.49% 78702.22 551419.7 5 8.93% 49241.78 502177.9 6 8.93% 44854.53 457323.4 7 8.93% 40838.98 416484.4 8 4.46% 18575.2 397909.2

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