Question

Bad co. has a new 4-year project that will have annual sales of 7,700 units. The...

Bad co. has a new 4-year project that will have annual sales of 7,700 units. The price per unit is $19.20 and the variable cost per unit is $6.95. The project will require fixed assets of $87,000, which will be depreciated on a 3-year MACRS schedule. The annual depreciation percentages are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. Incremental overhead costs debited to this project are $27,000 per year and the tax rate is 40 percent. What is the sum of the Unlevered Net Income and the depreciation expense for Year 3?

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Answer #1

Solution:-

Depreciation = $87,000 * 14.81%

= $12,884.7

Calculation of unlevered net income:

Particulars Amount
Sales $147,840
-costs ($80,515)
-depreciation ($12,884.7)
EBT $54,440.3
-tax(EBT * 40%) ($21,776.12)
Net income $32,664.18

Sum of unlevered net income + depreciation = $32,664.18 + $12,884.7

= $45,548.88

Working notes:

Sales = 7,700 * $19.2 = $147,840

Costs = variable cost + incremental overhead cost

= 7,700 * $6.95 + $27,000

= $53,515 + $27.000

= $80,515

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