pany has been doing well, reaching $1.02 million in earnings, and is considering launching a new product. Designing the new product has already cost $510,000. The company estimates that it will sell 773,000 units per year for $3.05 per unit and variable non-labor costs will be $1.09 per unit. Production will end after year 3. New equipment costing $1.01 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 $302,000. The new product will require the working capital to increase to a level of $387,000 immediately, then to $399,000 in year 1, in year 2 the level will be $341,000, and finally in year 3 the level will return to $302,000. Your tax rate is 21%. The discount rate for this project is 9.7%. 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 $ 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 Depreciatio

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

See similar textbooks

Related questions

Question

Your company has been doing well, reaching $1.02 million in earnings, and is considering launching a new product. Designing the new product has already cost $510,000. The company estimates that it will sell 773,000 units per year for $3.05 per unit and variable non-labor costs will be $1.09 per unit. Production will end after year 3. New equipment costing $1.01 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 $302,000. The new product will require the working capital to increase to a level of $387,000 immediately, then to $399,000 in year 1, in year 2 the level will be $341,000, and finally in year 3 the level will return to $302,000. Your tax rate is 21%. The discount rate for this project is 9.7%. 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 $ 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 (irrelevant). (Select from the drop-down menu.) (Round to the nearest dollar) $ $ $ (Round to the nearest dollar.) EA $ S Year 3

Expert Solution