Complete the chart for years 0,1,2 and 3, and find the NPV (round to 4 decimal p

Question

Complete the chart for years 0,1,2 and 3, and

find the NPV (round to 4 decimal places)

Your company has been doing well, reaching $1.12 million in earnings, and is considering launching a new product. Designing the new product has already cost $525, 000. The company estimates that it will sell 826, 000 units per year for $2.93 per unit and variable non-labor costs will be $1.06 per unit. Production will end after year 3. New equipment costing $1.02 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 $298, 000. The new product will require the working capital to increase to a level of $380, 000 immediately, then to $410, 000 in year 1, $341, 000 in year 2, and finally return to $298, 000. Your tax rate is 35%. The discount rate for this project is 10.4%. 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

Year 0 Year 1 Year 2 Year 3 Sales        16,76,780        16,76,780        16,76,780 Less:- Cost of goods sold           8,75,560           8,75,560           8,75,560 Gross Profit           8,01,220           8,01,220           8,01,220 Less: Depreciation           1,45,758           2,49,798           1,78,398 EBT           6,55,462           5,51,422           6,22,822 Less: Tax @ 35%           2,29,412           1,92,998           2,17,988 Incremental Earning           4,26,050           3,58,424           4,04,834 Add:- Depreciation           1,45,758           2,49,798           1,78,398 Less:- Incremental Working Capital               -82,000             -30,000              69,000              43,000 Less:- Capital Investment         -10,20,000 Sale of Asset           4,46,046 Cash Inflow/(outflow)         -11,02,000           5,41,808           6,77,222        10,72,278 PVF @ 10.4%                   1.000                 0.906                 0.820                 0.743 Present Value         -11,02,000           4,90,768           5,55,639           7,96,894 NPV             7,41,301 (sum of Present value of Cash flows) Calculation of Depreciation and book Value Year Value Rate Depreciation Book Value 1                                     10,20,000 14.29%           1,45,758           8,74,242 2                                     10,20,000 24.49%           2,49,798           6,24,444 3                                     10,20,000 17.49%           1,78,398           4,46,046 4                                     10,20,000 12.49%           1,27,398           3,18,648 5                                     10,20,000 8.93%              91,086           2,27,562 6                                     10,20,000 8.92%              90,984           1,36,578 7                                     10,20,000 8.93%              91,086              45,492 8                                     10,20,000 4.46%              45,492                        -

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