Question

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 754,000 units per year for $2.97per unit and variable​ non-labor costs will be $1.08 per unit. Production will end after year 3. New equipment costing  $1.1 million will be required. The equipment will be depreciated using​ 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3and plan to scrap it. Your current level of working capital is $305,000. The new product will require the working capital to increase to a level of $376,000 ​immediately, then to $404,000in year​1, in year 2 the level will be $345,000​, and finally in year 3 the level will return to $305,000. Your tax rate is 21%. The discount rate for this project is 9.9%.

Do the capital budgeting analysis for this project and calculate its NPV

Assume that the equipment is put into use in year 1.

Answer 1