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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

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter8: Cost Analysis
Section: Chapter Questions
Problem 5E
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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
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
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